More people are taking out auto loans than ever before. According to a 2017 report, over 107 million American adults have an auto loan. That’s 43 percent of American adults!
Are you surprised by this? Don’t be. Very few people have enough money in their bank accounts to outright buy a car, and most people only think about saving for a new car when their old one is on its last legs. An auto loan can give you the financial leverage to get the car you want.
If you’re going to get an auto loan, though, you want to make sure you get one you can afford, with the best possible interest rate. Otherwise, you may find yourself paying a lot more than you wanted over the next few years.
So how do you make sure you get an auto loan that works for you? A reputable dealer will have several financing options available, but their goal is to sell you a car, not get you a good loan. Your best bet is to visit your local credit union and get preapproved for a car loan.
What is a preapproved loan?
You may have heard of “preapproved” and “prequalified” auto loans before. However, it’s not always clear just what those terms mean.
Getting prequalified for a loan just means that the loan officer makes a “soft” credit check where they find out what your credit score is. Based on that information, they’ll give you a general idea of what loans are available to you and the interest rate you can expect. It’s a low-risk way to see what your options are for a loan, and it is a good starting point when you’re determining your budget. It’s useless when talking to auto dealers, though.
On the other hand, getting a preapproved loan is a bit more serious. When a lender preapproves you, they make a hard credit check (which will affect your credit score) and go through your credit report to make you a solid offer. It also means the dealer will treat you the way they would a cash buyer.
The Advantages of a Preapproved Loan
Once you have your preapproved loan, you have several advantages when buying a new car. First, since you know what kind of auto loan the bank is going to be offering, you can set a realistic budget for the kind of car you can afford. (Remember a good rule of thumb is to reserve about 10% of the purchase price for taxes and fees.) With this information, you can use an auto loan calculator to estimate your monthly payment and select an affordable option.
A preapproved loan also strengthens your negotiating position. Usually, dealers ask customers what their monthly payment is and then try to inflate that payment. Even if you only pay an extra 10 dollars a month that means you’re paying five hundred dollars more than you wanted on a five year loan. With preapproved financing, though, you can simply tell the dealer you’re a cash buyer and stick to negotiating the price of the vehicle.
This is also a good way to avoid upsells. If the dealer wants to sell you an add-on or extended warranty when signing the papers, you can always say you’re not going over the amount for which you were preapproved. Most lenders offer these products at a lower price and with better coverage.
If you’re in the market for an automobile, you can get preapproved by First Alliance online, over the phone, or in person. Our loan officers will work to get you the best possible rate—and one step closer to your new car.