If you’re looking to finance your next car, getting pre-approved for a loan early in the buying process is the best way to determine how much you can borrow (which likely dictates the type of car you can buy), what your monthly payments may be and how much you can afford. Pre-approval also gives you leverage when negotiating with dealers, as they know you’re a serious buyer who has already been approved for financing their purchase. It also gives you a definite ceiling and can help prevent overpaying or buying a vehicle outside your price range.

A pre-approved car loan is a loan that has been approved by a lender before the borrower has chosen a vehicle. The loan usually comes with estimated terms, such as the amount of money you can borrow, the interest rate and loan term.

When you’re pre-approved for a loan, you can narrow down your search based on the loan amount you’ll have available. This can save you plenty of time on your search and allow you to make informed decisions.

Pre-approved car loans may also result in better terms and lower interest rates than other types of financing, but it can also be used as a tool to negotiate a better deal on your vehicle with the dealership and other financial institutions upon purchase.

Pre-approval requires some effort on your part but the tradeoff for time spent exploring your options is a better chance of getting the best deal on your loan. Here are several reasons why getting pre-approved for a car loan is worth it:

It Helps You Budget

Getting pre-approved for a car loan gives you an idea of how much you can afford to spend on a vehicle. It also allows you to shop around for the best interest rate and terms, so you can get the most value for your money.

Knowing exactly how much you can spend on a car also helps you stay within your budget and avoid hasty purchases and overspending.

You Can Negotiate at the Dealer

Getting pre-approved for a loan doesn’t mean you have to go with one lender. Frequently, dealerships may have attractive financing offers for qualifying buyers, such as zero percent APR. If a dealer sees you’ve been pre-approved for a loan, they may be willing to offer you a lower interest rate or a longer loan term in order to get your business. They may also be open to negotiating on the price of the car itself, as they know you have the means to purchase it.

You Can Deflect a Bad Deal

Conversely, without being pre-approved for an auto loan, dealers may try to inflate their interest rate when you get a loan through them.

Getting pre-approved for an auto loan gives you leverage when negotiating with the dealer, as you can show them that you have a better offer from another lender. You can also research the fair market value of the car and compare it to the dealer’s asking price to make sure you’re getting a fair deal.

1. Check your credit score: Before you apply for an auto loan, find out your credit score. This will give you an idea of what kind of loan terms you may qualify for. Keep in mind, if your credit is less-than-perfect, your offers may not be favorable or you may need a cosigner.
2. Gather your financial information: You’ll need to provide information about your income, expenses, debts and assets when applying for auto loan pre-approval. Providing pay stubs, utility bills, rent payments or other information may be necessary for showing you are well-established and financially reliable.
3. Shop around: Compare rates and terms from different lenders, including banks and credit unions, to find the best deal for your situation. Don’t forget to factor in any additional fees or charges that may be associated with the loan. It may be a good idea to contact the financial institution you bank with to see if they offer any special loan programs or discounts to loyal customers.
4. Apply for pre-approval: Once you’ve found a lender that meets your needs, fill out their pre-approval application and submit it along with any required documents. The lender will review your application and let you know if you’ve been approved or not.
5. Negotiate terms: If you are pre-approved for an auto loan, use this as leverage when negotiating with car dealerships or private sellers to get the best deal possible on the car you want to buy.