What's a Loan Pre-Approval?
When planning to buy a car, there are a quite a few decisions that you have to make. If you can isolate these and take each step in the process individually, you're in a better position to get great value for money at each step in the car buying process.
One of the first things that you should consider is how you'll pay for your car. If you don't have enough money saved, or if you want to keep your savings for something else, this might mean taking out a car loan.
What is a Loan Pre-Approval?
A loan pre-approval is a letter from the lender that states how much they are willing to lend you, based on some assumptions. The assumptions in the pre-approval usually include:
- You'll stay in the same job with the same rate of pay as when you applied for the pre-approval.
- For a secured car loan, you'll purchase a car that's less than 7 years old.
- Your assets and liabilities will not dramatically change before the loan is settled.
Applying for a car loan pre-approval doesn't lock you in if you find a better car finance offer later on.
How can I apply for a pre-approval?
You can apply for a loan pre-approval with a bank or with a car loan broker. When you apply with a car loan broker, they will assess your financial profile and match you to the loan that you're most likely to be approved for and best meets your needs.
To grant your pre-approval, the lender will check your credit file. If you apply for too many separate loans, this can reduce your credit score.
If you apply for a car loan directly through a lender, make sure that you read the eligibility criteria to make sure you'll be pre-approved. Not all lenders can offer a car loan pre-approval, but a car loan broker can match you with a lender that does.
How long does the pre-approval last?
A loan pre-approval is usually valid for 2-3 months. After this time period has elapsed, you may need to provide further evidence of income and update any details that may have changed on your original application to extend the pre-approval.
How does a Loan Pre-Approval benefit me?
A car loan pre-approval provides some benefits including:
Fixed budget to shop within
Once you have your pre-approval, you know exactly how much the lender is willing to lend you, so you know how much you can spend on the car.
You can use a car loan calculator to get a rough idea of how much you can afford to borrow based on the repayment amount you can afford each pay cycle.
Strong bargaining position
With your car loan already organised, you can focus on negotiating the price of the car to get the best possible deal. This is an advantage whether you are purchasing from a dealer or through a private sale.
If a dealership offers you car finance, you can compare their offer to the one that you already have.
The buying process will be faster once you have a pre-approval. If you have enough time to plan ahead and arrange a loan pre-approval, then when you find the perfect car you are in a position to move on the purchase immediately.
This reduces the chance that someone else will buy your ideal car while you're trying to arrange your finance.
You're not locked in and there's no cost
If you find a better finance offer for the car that you want to buy, you don't have to proceed with your pre-approved car loan, and it will have cost you nothing too. The pre-approval essentially acts as your bargaining tool to getting the best possible car loan offer.
Just remember that when you compare car loans, you need to consider the application fee, account fees, and any break fees or lump sum payments due at the end of the loan term, as well as your interest rate.
How can I get a car loan pre-approval?
The easiest way to get a car loan pre-approval is to apply through a car loan lending specialist. This enables you to compare the available loans on the market, with the help of a lending specialist, and select one without taking a hit to your credit file.
If you find a loan that suits you, you can then proceed to apply with that specific lender to get your pre-approval.
Once you have your pre-approval, the next step is to find out what to research when you're buying a new car.