How to Get Pre-Approved For An Auto Loan
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How to Get Pre-Approved For An Auto Loan
Every year, thousands of Americans go auto shopping without realizing they can get an auto loan without the help of their car dealer. According to the Federal Deposit Insurance Corporation (FDIC), just over 40% of loans originate at auto dealers, but these often come with hidden fees and incentives at the cost of the consumer.
Can you get a car loan with better terms than at a car dealership? With a little research and patience, you may be able to drive off with a better monthly payment than any smooth-talking salesman can provide.
How Do Auto Loans Work?
Auto loans are secured installment loans offered by banks and credit unions. In order to finance the purchase of a new or used automobile, financial institutions will step in to cover the balance beyond your down payment. In turn, the bank or credit union will put a lien on the car, as guarantee of payment. If the borrower falls behind or goes delinquent, the lender can repossess the car.
There are two main ways auto loans are written and originated. If a consumer gets a loan from an auto dealer, they are shopping through the indirect market. When borrowers get their car loan pre-approval directly through their bank or credit union, however, they are shopping on the direct loan market.
What Is a Good Interest Rate for an Auto Loan?
No matter where you get your auto loan, the rate is based on several factors: Your credit history and the current prime rate all play into your final interest rate.
According to the most recent quarterly report by Experian, the average auto loan interest rate for new cars is 5.61%, while the average interest rate for used cars is 9.65%. However, your best car loan interest rate will be based on your credit score.
For example, if you have a prime credit score between 661 and 780, a good interest rate is around 4.86% on a new car (or 6.04% on a used car). If you have less-than-great credit, you could face anywhere between 7.65% and 11.92% interest (or between 11.26% and 17.74% on a used car).
Average Interest Rates for Auto Loans
Why Get Pre-Approved for an Auto Loan?
Before shopping, there are many different reasons to get an auto loan pre-approval ahead of time. This can include being able to set a budget for a realistic purchase price, avoiding the dealer markup, and gaining leverage on the final sale price.
Set a Realistic Purchase Price
By getting your loan term and interest rate up front, you’ll be able to control your monthly payments long before setting foot in any auto showroom. This cuts through much of the negotiations and lets you find the right auto for your budget and lifestyle.
Avoid Dealer Add-Ons
Although car dealerships make money by selling cars, they make even more on all the additional options – which get added to your final loan. Everything from extended warranties to clear-coat applications add a premium to car prices, which go straight into the dealership’s pockets.
Walking in with a car loan pre-approval means that you’ll have your monthly payment and loan term in advance. This will help ensure that you get only what you pay for (without hidden add-ons).
Secure a Lower Interest Rate
A car dealership has the ability to work with many different lenders. What they won’t tell you, however, is that for every loan they originate, they receive a commission. In many situations, that commission is passed on to you in the form of a higher interest rate.
Having an auto loan pre-approval letter allows you to skip the drama of waiting on bank approvals. You may be able to secure a better interest rate by working directly through a bank or credit union, instead of waiting on a dealer to find the best opportunity for their bottom line.
Strengthen Your Negotiating Power
If you rely on a loan from your auto dealership, the sales team has the power to determine the final sales price. Because they have to determine whether you qualify for a loan – and which terms are best for them – they can lock you into a payment which may be higher than you are comfortable with.
If you walk into a car dealership with a car loan pre-approval letter in hand, you’re already a qualified buyer with money to spend. This gives you leverage during price negotiations. In certain situations, car sales teams may actually be willing to reduce an auto’s price if you are prepared to make a purchase.
Where to Get Approved for an Auto Loan
Thanks to the internet, it seems like there’s no shortage of financial institutions that want to give you an auto loan pre-approval. Don’t trust everything you see online.
Start with Your Financial Institution
If you’re looking for car financing, start with your bank or credit union. With an established history, you may be able to pre-qualify for an auto loan from your financial institution without much difficulty.
Do Your Research
When shopping around for the best auto loan rates, do your research on potential partners. Both the Consumer Finance Protection Bureau (CFPB) and the Better Business Bureau (BBB) have profiles on hundreds of banks, credit unions, and other lenders – with documented complaints and resolutions.
Before submitting any personal information (like your Social Security number), check out how they rate with both organizations. If they don’t have a high rating, don’t consider them for your loan search.
What You Need to Get Pre-Approved for an Auto Loan
Once you’ve decided to get your auto loan pre-approval, it’s time to go through the application process. Before a bank or credit union will give you a car loan pre-approval letter, you will need to prove your identity, your monthly income, and know your credit score.
Proof of Identity
When applying for a car loan pre-approval online, you will be required to prove your identity. In many cases, your potential lender will pull personal questions from your credit report in order to verify your identity.
This process isn’t always a failsafe option. If you get an answer wrong, you may be asked to submit additional documentation. This may include a copy of your state-issued photo ID, social security card, and proof of residence. In most situations, you can submit these documents online through a secure portal provided by the lender.
In order to qualify for an auto loan pre-approval, you may also be asked to prove your ability to pay. If a lender cannot verify employment during your application process, you’ll need to submit supporting documents.
In order to prove that you have a steady source of income, requested documents from a lender may include your most recent W-2 Form, pay stubs, or tax returns from the past two years. Again, these documents can often be sent online through a secure portal.
Minimum Credit Score
Finally, your interest rate and the amount you are allowed to borrow will ultimately depend on your credit history and credit score. According to Experian, the minimum credit score varies by auto loan lender, making it difficult to know the exact minimum credit score required. In the most basic terms, the better your credit score is, the better your loan terms may be.
Before you apply for auto loan pre-approval, you’ll want to do everything you can to maximize your credit score. This includes paying down debt, reducing your debt-to-income ratio, and minimizing your credit applications.
Auto Loans for Bad Credit Are Available
During the shopping process, many shoppers wonder: “If my credit isn’t great, can I get a car loan?” Even if you have subprime credit, auto loans are available. Certain banks specialize in working with individuals rebuilding their credit after a bankruptcy or period of bad credit.
Even though you can still get an auto loan with bad credit, your interest rate will almost certainly be higher than those who have good credit. Before starting the process, take a close look at your budget to determine how much you can afford. Use an auto loan calculator (below) to determine how much you may be forced to pay based on car price, loan term, and interest rate.
Avoid Self-Financing Car Dealerships
If you have bad credit, never go to a “buy here, pay here” auto dealer. Self-financing car dealerships often charge “excessively high interest rates,” which increase the chances of a borrower going into default.
In one such case, the CFPB took action against a car dealer that advertised loans with a 9.99% average interest rate, but forced buyers into paying for extras with their loan. Self-financing dealers often spell bad news for car buyers. Avoid them at all costs and try to get a car loan pre-approval instead.
How Much Car Can I Afford?
As you start narrowing down what kind of car you are looking for, it’s important to determine how much you can afford. While your auto loan payment is the biggest part of the equation, auto insurance premiums will add on to the monthly price tag.
During the shopping process, it’s important to get an idea of how much your monthly insurance premium may be. Because you will be relying on car financing, your insurance company will require you carry comprehensive coverage on your car.
You may be able to work with your insurance agent or auto insurance company to determine how much your car insurance premium would be on your next vehicle, and work together to find the right vehicle, the right price, and the right insurance payment.
Auto Loan Calculator
If you aren’t sure where to start, use a car loan calculator to determine just how much you can afford. An auto loan calculator will help you simulate your monthly budget based on your total loan amount, interest rate, and loan term.
If you use Excel to manage your personal finances, you can use the spreadsheet program to calculate your monthly auto loan payment.
How to Buy a Car with Pre-approved Loan
Once you have the auto loan pre-approval letter from your bank – and have picked out the car you’d like – start the process by contacting the dealer to ensure it is still available. You can inform the dealer up-front that you’ll be working with a lender and will bring along your pre-approval information.
Work with the sales team to negotiate a fair price that’s not only within your budget, but also fits within the terms of your loan. After settling on the price, the dealership’s finance team will work directly with your lender to originate the loan, get the car registered with your state’s motor vehicle authority, and send the original vehicle title to the lender.
At this point, you will “own” your car, and can start making payments to your lender. Unless you have a special promotion, your first payment will usually be due within 45 days of the purchase date.
Best Rates for Auto Loans in 2021
If you are ready to go car shopping, your first stop should be at the bank. Finding the best rates for auto loans takes patience and a little know-how. Start by using an auto loan calculator to determine how much you can afford to spend and how much money you should put down.
From there, it’s off to the banks to see where you can get your best potential interest rate. Here are some of our recommendations on places to shop for your auto loan.
Bank of America Auto Loan
Bank of America offers auto loans as low as 2.69% on dealer new vehicles and 2.99% on dealer used vehicles. The bank has an A+ rating with the BBB, and the CFPB received only three complaints about the bank in the past three years (ending July 31, 2020).
Capital One Auto Loan
Capital One offers a one-stop shop for auto loans through their Auto Navigator platform. With a network of dealers using Capital One, users can get auto loan pre-approval on their website (which can be used at a participating dealer). Although the bank does not advertise their best rates for auto loans on their website, Capital one has an A-rating with the BBB and had 885 complaints filed with the CFPB between July 31, 2017 and July 31, 2020.
Wells Fargo Auto Loan
Wells Fargo works directly with over 12,000 dealerships in the United States to offer auto loans. Although those who bank with Wells Fargo can apply for a car loan in their local branch, they do not offer car loan pre-approval online.
USAA Auto Loan
While membership into USAA is limited to active-duty military, honorably-discharged veterans, and their immediate families, their banking products are highly-rated. USAA Bank offers auto loan pre-approval that’s good for 45 days, with new car loan interest rates as low as 2.59% and used car interest rates as low as 2.99%. USAA has a B+ rating with the BBB, and the CFPB has received 77 vehicle loan complaints about the bank July 31, 2017 and July 31, 2020.
Chase Auto Loan
Chase offers auto loans both direct to consumers and through a network of dealerships across the United States. The bank offers a pre-qualification process on their website that’s based on users’ income and credit. After answering a few quick questions, Chase will use a soft credit check to determine how much you may qualify for. Chase has an A+ rating with the BBB, and the CFPB has received 642 complaints about auto loans July 31, 2017 and July 31, 2020.
Credit Union Auto Loan
There are over 5,700 credit unions in the United States, each offering a suite of banking options to their members. Most offer auto loans to their members at different terms and interest rates. Before you can get a car loan pre-approval from a credit union, you must become a member. Start by asking your employer about credit union membership as part of a preferred employer group.
If not, you may qualify for credit union membership based on where you live, work, or worship, the clubs you are a member of, and even where you graduated college. You can learn about how credit unions work at mycreditunion.gov, or research a potential credit union partner at the National Credit Union Administration website.
Other Online Auto Loan Options
If major banks aren’t right for you, check in your area to see if there’s another avenue to get a car loan pre-approval. Smaller financial institutions serving your area may offer online auto loan options with competitive rates.
You can also turn to a major auto loan finder website, which compares rates you may pre-qualify for across multiple lenders. Again, before you decide to shop through a comparison site, be sure to research them with both the BBB and the CFPB to ensure they are a legitimate option.
Ask the Experts About Auto Loans
InvestingAnswers is on a mission to help consumers build and protect their wealth through education. That is why we have experts answering your pertinent questions at the end of each article.
How Do I Refinance Auto Loans?
Even after securing a car loan, it may be in your best interest to refinance your car loan to save money or reduce your number of payments. To start the auto loan refinancing process, contact your bank or credit union to understand the options available to you.
How Do I Get out of a Car Lease I Can’t Afford?
If you find yourself with a car lease payment you can’t afford (maybe from losing a job), you have options. Every lease offers a termination and payoff clause, allowing borrowers to legally end their lease by making a settlement payment. If that payment is too high, start by negotiating payments with the lender to determine if making smaller payments is viable.
You can also apply for a lease buyout auto loan, which would extend payments while keeping the car in your possession. As a last resort, individuals can also voluntarily surrender the vehicle to repossession or file for bankruptcy protection.
Can Auto Loans Improve My Credit Score?
Auto loans are an installment loan with activity reported to all three credit bureaus. If you make the payments consistently and on time, an auto loan may be able to improve your credit score. However, if you are delinquent in payments and fall into loan default, a loan termination and repossession can also decrease your credit score.
Can Auto Loans Be Paid off Early?
It’s possible to pay off auto loans early, but your payoff terms will be written out in your loan documentation. To pay off an auto loan before the term ends, call your lender and ask for the loan payoff amount (be sure to ask if there is a penalty for early payoff). If you have the cash available, you may be able get out of your loan early and receive your title from the bank.
Will Auto Loan Rates Drop?
Auto loan rates are based on a number of factors, including economic activity, the prime rate, and your credit score. Although it’s impossible to determine, shoppers can follow indicators (including the Federal Reserve interest rates) to help them predict if and when auto loan rates may drop.