More people are taking out auto loans than ever before. According to a report put out by the Public Interest Research Group, 85% of all new car buyers took out an auto loan in 2022. In addition, over 55% of people buying a used car took out an auto loan.
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 pre approved for a car loan.
You may have heard of “pre approved” and “pre qualified” auto loans before. However, it’s not always clear just what those terms mean.
Getting pre qualified 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 pre approved loan is a bit more serious. When a lender pre approves 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.
Once you have your pre approved 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 pre approved 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 pre approved 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 up sells. 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 pre-approved. Most lenders offer these products at a lower price and with better coverage.
If you're in the market for an automobile, getting pre approved for an auto loan can make the car-buying process much easier. Getting pre approved not only lets you know how much car you can afford to buy, but it also gives you a stronger negotiating position when talking with auto dealers.
When you're ready to get pre approved for an auto loan, talk with a lending advisor at First Alliance Credit Union. They'll work with you to help you figure out how much you can borrow and what kind of interest rate you can expect. They might even suggest some auto-buying resources that First Alliance has to offer, such as our downloadable SMART goal packet that will help you put aside money for a new car.