Why Get Pre-Approved for Your First Car Loan?
There are many common misconceptions about the car-buying process, one of which is that you have to accept whatever financing the dealership offers you when you go in to sign the paperwork. The truth is, as the buyer, you have options — and knowing this gives you more power over the loan you end up getting. Doing a little legwork ahead of time can help you explore options available to you and find the best deal possible given your financial situation.
Wondering why you should get pre-approved for your first car loan? Keep reading to learn more about the advantages of pre-approval.
You’ll Crunch the Numbers Before Car Shopping
Car dealerships can be notoriously fast-paced environments, which can make it more challenging to think clearly and make wise decisions on the spot — especially if charismatic salespeople are making that car that’s just out of your budget sound too good to pass up.
If you get pre-approved, you’ll know exactly how much you’re able to take out in the form of a loan. Here’s a pro tip from Magnify Money: Instead of planning to borrow the maximum amount for which you’re preapproved, aim to stay eight to 10 percent under that loan amount. This will give you a healthy amount of wiggle room for taxes and fees, keeping you within budget.
You’ll Avoid Having to Pay Dealer Markups
Another advantage of getting approved ahead of time for a first-time car buyer loan is that you’ll be able to sidestep dealership markups.
Many people don’t know that it is, in fact, legal for dealerships to charge customers higher interest rates than the lender offers and keep the difference. According to data cited by the Washington Post, dealers charge nearly $1,800 per loan in markups, on average.
Pre-Approval Gives You a Bargaining Chip
Ultimately, walking into a dealership with pre-approval from one or more non-dealer lenders can give you extra bargaining power when it comes to trying to negotiate the best deal possible.
There are a few ways in which this can help you make the most of negotiations. First, you’ll have a better idea of what a competitive offer looks like based on your financial situation — like your credit score and income. In other words, you’ll know what a worthwhile offer looks like versus one with a high interest rate. Without pre-approval, you might feel more obligated to accept whatever the in-house financing department offers you, even if the annual percentage rate (APR) is very high.
Furthermore, you can stand firm during negotiations, confidently asking for the purchase price and interest rate you want to receive. Salespeople will not have the opportunity to manipulate monthly payments by adjusting factors like the loan amount, the length of the loan, and its interest rate if you have a firm offer already in hand.
You’re essentially operating like a cash buyer with a pre-approval on your side, which allows you to focus on the vehicle’s price rather than its monthly payment amount. This takes the haggling and complication out of it, allowing you to get down to the nitty gritty of the cost.
To sum up some of the most compelling reasons why it’s worthwhile to get pre-approved for your first car loan: Not only does it tend to make the car-buying process smoother and easier, but it can also help save you money by giving you options from which to choose.
Even if you don’t end up going with the loan for which you’re pre-approved, its presence can still give you additional power during negotiations. At the end of the day, there’s no real downside to having more options available.
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