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How to Get Pre-Approved for a Car Loan

With all of the uncertainty that goes with buying a vehicle, many consumers opt to get pre-approved much earlier in their car buying process, just like you would for a mortgage. But what are the actual benefits of doing this? And why should you bother with getting pre-approved?

This article covers the pre-approval process, plus the benefits of getting this done ahead of time.

Why Get Pre-Approved?

 

A pre-approved car loan is a great way to know that you are getting the best deal possible on your vehicle’s financing. Someone with a great credit history will qualify for a much lower interest rate than someone with poor credit.

It also saves time.

Many customers with a limited credit history or with concern over prior credit issues should choose to get a pre-approval before shopping for a vehicle. While those with a low credit score may not qualify for a loan at all, those with credit somewhere in the middle may qualify, but at a higher interest rate. This allows them to set a budget at monthly payment they can afford.

Learn about CREDIT and why it’s so important: What You Need To Know About YOUR Credit Score.

Car Loan versus Pre-approval

CAR LOAN – When you apply for a car loan, you will fill out a credit application and get approved for financing after you have selected a car and signed an offer to purchase.

PRE-APPROVAL – With a pre-approved car loan, you get approved for financing first. The lenders will determine what interest rate, term, monthly payment, and the amount you qualify for. Once approved, the dealership can then narrow your search and help you find the best vehicle for you, within your budget. You know how much you can afford and what you qualify for before shopping.

So, where do you begin?

  1. Check Your Credit Score Before Applying for an Auto Loan

It’s important to know what your credit score is to determine what rates you should actually qualify for. Unfortunately, 0% financing promotions do not apply to everyone – and not everyone will be approved. You can check your score for free without harming your credit on sites like Credit Karma. With this information, you’ll know roughly what rates you can get.

NOTE: You can check your credit score yourself frequently without harming the number. However, applying for multiple loans from different lenders will flag your file and may affect your credit score negatively.
  1. Know Your Budget

As a rule of thumb, you don't want to spend no more than 20-30% of your take-home pay on a vehicle payment, but 10-15% is ideal. This leaves room for other transportation expenses such as gas/charging, insurance, and maintenance without stretching your budget too thin.

The lender will also look at your monthly expenses versus your income. This is known as your gross debt-service ratio. Your TDS is the percentage of your monthly household income that covers your housing costs and any other debts. By law, in Canada, they will not approve a loan where your debt-service ratio is more than 42% of your total income. Here’s an example:

If you bring home $5000 per month after tax, the sum of your monthly car payment, rent or mortgage, and other monthly loan or credit card obligations need to total $2000 or less. This leaves $3000 for all other monthly expenses. A car payment in the 10-15% range would be $500-$750.

  1. Browse within your Budget

Study websites like your local dealership and Autotrader to research the price of vehicles that you are considering. Input these prices, and your estimated interest rate, into an auto loan calculator to reveal your monthly payment and budget accordingly.

What About Down-Payment?

While $0 down loans are available, it may be difficult to qualify for zero down if you have relatively new credit or any previous bad credit. Cash is king – putting money down on your loan makes it easier to qualify, will reduce your interest expenses, and may even qualify you for a better interest rate.

Even if you have been previously turned down for a car loan, having 10-20% of the purchase price of the vehicle ready as a down payment, is a great way of turning a declined application into an approval.

Indeed, many financial experts recommend putting at least 20% of the purchase price as down-payment on a car loan. If you put any less down, your payments may not have caught up to what the car is worth, aka negative equity. Let’s break it down for you:

  • According to Edmunds, a car depreciates in value by 9% as soon as you drive it off the lot. By the end of the year, that same car has lost about 19% of its value. So, if you buy a $20,000 car with 0% down, by the end of the first year your car is worth $16,200 through depreciation.
  • Let’s assume a 4% annual percentage rate (APR) interest on a 5-year loan. With 0$ down, you’re paying about $370 per month. Your remaining amount owing after one year is roughly $15,560, not including applicable taxes, fees, and finance charges of the loan itself.
  • However, it’s a different scenario if you put 20% down. Your car payments are $295 per month and your remaining amount owing is $12,460 (not including all the extra charges). You owe less, you’re paying less per month, and you’re nearly halfway to paying off the car completely after just one year.

Where to Get Pre-Approved for a Car Loan

Your best bet will be to book an appointment a local dealership you trust to talk to a financial services advisor. This person will be able to offer you personalized advice and guide you through what can be a complicated and stressful process. Dealerships like KIA Victoria have access to countless lenders and are adept at finding creative solutions.

Another benefit of heading to a dealership is that any credit inquiries performed within a 14-day window are combined and therefore considered as a single credit check. Your financial services advisor has access to all the lenders in one place, and will have answers for you right away. Applying for pre-approval through multiple institutions yourself takes time and may not be completed within that 14-day period, and can impact your credit score negatively.

How to Get Pre-Approved

It is a very quick and simple process to get pre-approved if you have all the information prepared ahead of time. Before going through the loan application gather up the following:

  • Up-to-date drivers license (with legal name and current address)
  • Rent or mortgage documents showing your monthly expenses
  • Record of employment or proof of income/pay stubs.
  • Some lenders require your SIN.

Financing a New Vehicle

Financing a new vehicle offers more variety and much more attractive interest rates compared to pre-owned. With approved credit, your best bet will be to go with the manufacturer’s financing plan as it offers the lowest possible rate in most cases. Assuming the manufacturer offers a brand loyalty incentive and you’re willing to finance for a shorter-term, most manufacturers can often offer favourable rates.

For those not able to be approved on the manufacturer program, banks and online lenders can still finance the vehicle, but at a higher rate.

Financing a Used Vehicle

Financing a used vehicle is done through banks and other lending institutions. Using the research you did earlier, you should know roughly what rate you will qualify for, what down payment is needed, and what your monthly payments will be.

Why Bother With a Pre-Approved Loan? Here’s a list of benefits:

  1. It helps you more accurately budget your auto expenses by revealing your exact interest rate.
  2. It is a big time saver. You will only be looking at and test-driving vehicles that you actually qualify for.
  3. By getting pre-approved, you can often establish a lower interest rate and better terms than otherwise.
  4. You will end up buying the car that you can afford. Honestly assessing your budget will direct you to a range of vehicles whose payment fits your monthly expense load. Eliminating the stress of a car loan that strains your budget is invaluable in the future.

We hope we've answered most of your questions here. If you'd like to start a preapproval process, let's chat! Start here.

Other articles that may be of interest:

What You Need To Know About Your Credit Score

What's Better For Me: To Lease or Finance

How To Get The Most For Your Trade-in

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