Auto Loans: Is One Necessary Before Going to the Car Dealership?

Naturally enough, as buying a car is such a significant financial decision, especially if your purchase involves financing through an auto loan, you will want to get every aspect of the process right.

Finding a great car to buy is not the hard part. If you search Nevada car dealerships, for instance, you will find an excellent selection to choose from. The next step is working out the best way to pay for your new car. While many car buyers rely on dealership financing to secure their loans, getting pre-approved for an auto loan, before stepping foot on a car lot, is an option that can offer numerous advantages.

Let’s explore why it can be beneficial to have financing in place beforehand and how it can put you in a stronger position when buying a car. 

What is Pre-Approval for an Auto Loan?

Pre-approval for an auto loan means that a lender evaluates your financial information, such as income, credit score, and debt-to-income ratio, and uses this data to determine the loan amount and interest rate you qualify for.

When this process occurs before you start shopping for a car, or visiting a dealership, it helps to give you a clear understanding of your budget and financing terms. 

What are the Advantages of Getting an Auto Loan Before Visiting the Dealership?

Having an auto loan offer or pre-approval before visiting the dealership can work in your favor in several ways. Primarily, it could end up saving you money, and it can also  simplify the negotiation process.

When you have a pre-approved loan, you know exactly how much you can afford to spend on a car. This eliminates the guesswork and helps you stay within your budget. It’s probably fair to say that too many buyers tend to overestimate what they can afford, leading to financial strain or regret later on.

Pre-approval ensures you focus only on vehicles that fit your financial situation. 

A Good Way to Leverage Competitive Interest Rates

Some dealerships have been known to mark up interest rates on auto loans in order to increase their profits. When you secure an offer of financing independently, you can shop around for the best interest rate and terms, potentially saving you thousands of dollars over the life of the loan. 

It’s worth remembering that a 1% difference in interest rates on a $30,000 loan over five years can result in savings of $800 or more.  By comparing rates, you gain a better understanding of what’s fair and avoid inflated rates offered by the dealership. 

Strengthen Your Negotiation Power

Having pre-approved financing positions you as a cash buyer in the eyes of the dealership. Without doubt, this shifts the focus of negotiations to the price of the car itself rather than monthly payments or financing terms, which can sometimes include hidden fees or inflated rates. 

Pre-approval keeps the negotiation straightforward and ensures you’re not overpaying for the vehicle. 

A Good Way to Avoid Unnecessary Credit Inquiries

When you apply for financing at a dealership, they often send your application to multiple lenders, resulting in several hard credit inquiries. This can temporarily lower your credit score and complicate your financial standing. 

Pre-approval helps avoid this situation. By securing financing beforehand, you limit the number of inquiries on your credit report. Generally speaking, shopping around for rates within a short time frame is treated as a single inquiry by most credit scoring models, helping minimize the impact. 

Help preserve your credit rating by limiting the amount of applications you make for credit at one time.

Save Time at the Dealership

Car buying can be a lengthy process, and waiting for dealership financing approval can add hours to an already long day. With pre-approval, you’ve already completed a significant portion of the financing process, allowing you to focus on selecting and negotiating the car itself. 

It can also be said that time saved at the dealership means less pressure and a more enjoyable car-buying experience, although, in fairness,  not all car sales centers operate in this high-pressure way. 

Lock in Favorable Terms

Market conditions, interest rates, and your credit score, are all things that can fluctuate. By securing a loan beforehand, you lock in terms that suit your financial situation, providing peace of mind as you shop. 

Pre-approval gives you a clear picture of your loan terms, so there are no surprises when it comes to signing the paperwork. 

Even if you have pre-approval, you can still explore dealership financing as an option. Having a pre-approved loan gives you a benchmark to compare against any offers the dealership might present to you.

If the dealership can beat your pre-approved rate, you’re free to take advantage of it, so it’s a win-win. Pre-approval puts you in a win-win situation—you either use your secured loan or benefit from a better offer. 

How to Get Pre-Approved for an Auto Loan

If you’re considering taking the pre-approval route, here are the main steps to take.

Start by checking your credit score. Your credit score significantly impacts the interest rate and loan terms you qualify for. Aim to improve your score before applying if you think it might not give you access to the best interest rates.

Research lenders to find the best rates and terms. Then apply for pre-approval by providing all the necessary documentation, such as proof of income, employment details, and identification. 

If approved, you’ll receive details about the loan amount, interest rate, and term. 

With your pre-approval in hand, you can start to visit dealerships knowing exactly how much you can spend. 

When Dealership Financing Might Be Better

Although getting an auto loan beforehand offers many advantages, there are certain instances where dealership financing could be worth considering: 

Remember, dealerships often run promotions like 0% financing or cashback deals, which may not be available through external lenders. This could tip the scales in their favor and save you money.

Convenience is another factor. If you’re short on time and have already found the perfect car, dealership financing might simplify the process. 

The bottom line is that even if you opt for dealership financing, your pre-approval acts as a backup. This helps make sure you don’t accept unfavorable terms. 

As you can see, while it’s not absolutely necessary to secure an auto loan before visiting a dealership, it’s often a wise move that can help you cover all the bases.