Many Aussies set their sights on the car they want to buy before applying for a car loan. Finding out that a lender won’t let you borrow enough to buy the car of your choice can be disappointing. Some people try to prevent this from happening by getting pre-approved for a car loan. If you’re wondering ‘what does getting pre-approved for a car loan mean?’, it simply means the lender signs off on loaning you a certain amount of money.
Pre-approval doesn’t guarantee that you’ll get the car loan but it can help narrow your search by giving you a ballpark figure you may be able to borrow. You’ll still need to make sure that your financial circumstances remain the same between the time you get pre-approved for a car loan and when you’re fully approved.
How does getting pre-approved for a car loan work?
Getting pre-approved for a car loan involves some of the checks that are conducted before a car loan is completely approved. You’ll often need to submit identity documents, as well as bank documents or payslips to prove you have the income to repay the loan. Also, the lender will often wish to do a credit score check. If the lender is satisfied that you are likely to repay the loan, they will offer pre-approval, which is a conditional consent to the loan that is usually valid for a few months.
You will need to shortlist a car within their timeframe and apply for the car loan. The lender will check that the selected car meets their lending criteria, and also confirm that the information provided for your pre-approval hasn’t changed significantly. For instance, if you are buying a used car with a pre-approved loan, then some lenders may insist that it’s no older than seven years.
Again, if you have lost your job or your business income has shrunk, the lender may require you to explain how you plan to make up for the lost income before approving your car loan.
Should I get pre-approved for a car loan?
Considering that only a few lenders offer pre-approval for car loans, you may not find a suitable lender to get a car loan pre-approved. Nevertheless, you may want to look at the advantages and disadvantages of pre-approved car loans.
Some of the advantages include:
- It simplifies searching for a car by helping specify a suitable price range
- It gives you the confidence of knowing you can get a car loan before you begin looking
- It can help with negotiations with car dealers as you don’t need to depend on them for financing options
At the same time, there are these disadvantages to consider:
- You can get pre-approved car loans from just a few lenders, which means you may not have the option of holding out for better loan terms
- Pre-approvals involve a credit score check, which means they will be recorded as an inquiry in your credit report
- Pre-approvals don’t last very long, which means you may have to find a suitable car faster
How do I get pre-approved for a car loan?
You can apply for a car loan pre-approval online, but you’ll need to have all the documents and financial information readily available.
Also, it may be useful to do some homework before getting started on the car loan pre-approval process. You can research the type of car you want to buy and estimate not just its cost but any additional expenses, including stamp duty, and registration and insurance costs. Through this exercise, you’ll be able to estimate how much you need to borrow.
Keep in mind that you’ll have to pay for operating the car as well.
I got pre-approved for a car loan. Now what?
Once you’re pre-approved, you should confirm how long you have to find a car before the pre-approval expires. This may determine how you approach your car search.
It’s worth asking if there are any additional steps or requirements to move from pre-approval to approval, as this can vary between lenders.
How does getting pre-approval for a car loan affect my credit score?
Whenever you authorise a lender to request a copy of your credit report, the inquiry is listed in your report by the credit reporting agencies. If you end up registering too many queries in a short while, it can affect your credit score negatively.
Note that some lenders may offer a car loan pre-approval without a credit check, especially if you apply online. Unfortunately, this doesn’t accurately present your financial situation and, as a result, the pre-approved loan amount can differ significantly from the sum that’s finally approved.