Why you should get pre-approved for a vehicle loan before heading to the dealership

Couple purchasing a vehicle
Johnny CU

Johnny CU

Give yourself the upper hand at the dealership and save money with a vehicle loan pre-approval. It’s a conditional letter that takes the guesswork out of vehicle shopping and lets dealerships know exactly how much you’re qualified to borrow and what your loan payment should be.

Vehicle pre-approval vs pre-qualification: What’s the difference?

Unlike getting pre-qualified—which basically just means that you qualify for a vehicle loan based on your income and debt—a pre-approval typically requires an application which delves deeper into your financial background by looking at your credit history and assessing your current debt-to-income ratio. Having a pre-approval in your vehicle buying arsenal gives you leverage.

A pre-approval provides a realistic budget for vehicle shopping.

Experts recommend that you shouldn’t spend more than 20% of your monthly income on a vehicle loan payment—and even less if you have other outstanding debt like student loans, credit card payments, or a mortgage payment. A pre-approval letter will stipulate just how much you qualify for based on your current financial situation.

A pre-approval protects you from dealership markups and up-selling.

A vehicle loan pre-approval can mean the difference between a 3% and 6% interest rate. There’s no reason to roll the dice and wait until you’re at the dealership to see the rate you qualify for. Dealerships can mark up the list price and interest rate—potentially adding $1,000 or more to your financing—to turn a profit.

Dealerships may also try to up-sell packages like chrome wheels or all-season floor mats. By having a pre-approval letter, you can negotiate like a cash buyer based on the amount that you’re approved for, rather than succumbing to an inflated monthly payment.

happy new vehicle owners
It might not get you a better rate, but if you wear a blazer to the dealership, they’ll know you mean business.

Pre-approvals can protect you from rising vehicle rates.

When you walk away from getting pre-approved, you’ll get a “conditional commitment letter” that stipulates how much of a loan you’re pre-approved for and is generally valid for 60 days. At DuPage Credit Union, your rate is locked for 30 days and your pre-approval is good for 60 days.

Get the best vehicle rate by shopping around.

You did all the research to find the right vehicle for your budget, so why stop there?

Now it’s time to research lenders to find the best rate you can qualify for. That’s why we suggest getting multiple pre-approvals and utilizing a car service like TrueCar to find the best deals around.

Something to keep in mind is that dealerships tend to partner with larger financial institutions that may charge higher interest rates and assess financing fees in order to make a profit.

If you finance with a credit union, you’re likely to have a more personal experience, a lower interest rate, and no hidden fees.

Will getting a vehicle pre-approval hurt my credit score?

To process a pre-approval letter, lenders generally have you fill out an application to get the full scope of your creditworthiness. This means they have to pull your full credit history which can post as a “hard inquiry” on your credit report, potentially dropping your credit score by a few points.

If you’re ever in doubt, ask if the pre-approval will reflect on your credit report.

The good news, if you get multiple pre-approvals within a short time period, each inquiry will only effect your credit score as if they were one “hard inquiry.” To be on the safe side, you can check your credit score after 30 days for free at annualcreditreport.com.

“Hard Inquiry” vs “Soft Inquiry”
When a lender pulls your credit, it results in a “hard inquiry” and can cause your credit score to drop up to 5 points. A “soft inquiry,” like a background check or when you check your credit score on Credit Karma, does not affect your overall credit rating.

The Takeaway:

A vehicle loan pre-approval ensures that you get the best deal that you can without having to deal with unnecessary interest rate inflations or list price mark-ups.

At DuPage Credit Union, not only can you walk away with a pre-approval in minutes, but we’ll also try to get you the best rate for your auto loan, the best auto insurance options possible, and the greatest member service experience.

We cannot and do not guarantee payment examples applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

Johnny CU

An advocate for credit unions, Johnny CU loves sharing his knowledge of practical money-saving and money-earning advice with credit union members. Follow Johnny CU for the latest tech-focused articles and ways to improve your financial future.
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