When you prequalify for a car loan, it means you have already found a lender that is willing to work with you and has agreed to lend you the money that you need. The lender will have gone over your finances with you, either in person or on the phone, and come up with a loan amount for which you can qualify. While this can work differently from one lender to the next, it lets you know what you can borrow and makes the process of shopping for your next car a lot easier.
Almost any lender that offers car loans is willing to prequalify buyers, and it’s to your advantage to shop around. Check banks, credit unions and online sources to find the best deal. Look carefully at the annual percentage rate on any proposed loans as well as the terms. You most likely want to keep the monthly payments low, but taking out a longer loan to get lower payments ends up costing you more in the long run, so be careful. Also watch for prepayment penalties and loan fees that may get tacked onto your loan, raising the amount you’ll owe.
One of the best things you can do to help yourself get a good loan is to prepare in advance. The Federal Deposit Insurance Corporation recommends that consumers check their credit reports before buying a car. This gives you time to correct any errors you may find. Since your credit score is linked to the interest rate you get, inaccuracies can end up costing you money. Knowing what the current interest rates are for car loans can also help you when it comes time to negotiate with lenders. Question the lender if you are offered rates higher than average.
Once you’re prequalified, you will be buying your new car with the best possible terms, instead of depending on the dealer to get you a good deal. You also know how much you have to spend going in, and it becomes very difficult for the dealer to tack on any extras to your purchase, such as service contracts or special services, to increase dealer profits. For many people, not having to deal with the stress of sitting in the dealership’s office while the finances are worked out is another important benefit of prequalification.
Closing the Deal
Often, you’ll find that prequalifying means that the lender has told you how much you can borrow, but you still have to sit down with him to close the deal. Some lenders will simply run a credit check and get a verbal rundown of your finances when they prequalify you, while others will go through your financial records and verify your income before they approve your loan. In many cases the lender must also approve the car you’ve selected and will need details on the vehicle to complete the loan process, but it usually goes smoothly as a result of the prequalification.