When you're shopping for an auto loan, it seems that everywhere you look there's some advertisement shouting at you that you can "get pre-approved now!" But is this really the case? It may not be, especially if you need a loan and have less than perfect credit.
What Is an Auto Loan Pre-Approval?
A pre-approval for a car loan is a conditional approval from a direct lender with the estimated terms built in. This allows you to shop for a vehicle at a dealership or privately and know how much you can spend.
Pre-approvals come from direct lenders, such as a bank, credit union, or online lender. You can try to get pre-approved, but one major drawback is that it can be difficult to qualify for. Typically, pre-approved loans are reserved for people with good credit.
However, if you're able to qualify, this can be a great option for taking the hassle out of auto loan negotiations at the dealership. When you're pre-approved, the lender typically gives you a check to take to the dealer, so all you have to do is pick out a vehicle that fits your budget and is at or below the maximum amount of the check. There's no haggling over interest rates or down payments in this case.
Direct Lending vs. Indirect Lending
If you're planning to try for direct lending as a bad credit borrower, you may have better luck with a credit union, especially if you have an account in good standing. Credit unions are not-for-profit organizations, and tend to pass this savings on to members – often in the form of lower loan interest rates. If you're a member of a bank you may still have luck, however, banks tend to reserve their loans and their best rates for people with good credit.
Since direct lending isn't always an option with poor credit, an alternative is finding an indirect loan. When you get an indirect loan, you work with the finance department at a dealership, and they work with a lender on your behalf. The advantage to this is that certain dealers work with subprime lenders, who are equipped to help people with less than perfect credit.
Subprime lenders look at more than just your credit score to get you approved for a car loan. Other factors they consider are your income, employment and residence history, and your ability to provide a down payment. These things help these lenders determine if you have the ability, stability, and willingness to take out a vehicle loan.
Auto Loan Pre-Approval Tips
At the same time, pre-approval is definitely worth a shot, especially if your credit is only slightly lower than the typical good credit score range (usually around 670). As with any loan, it's best to be prepared before diving in.
Here are a few tips to help you prepare for the pre-approval process:
- Know where your credit stands – Knowing your credit is about more than just your credit score. Your credit score is based on information in your credit reports, and you need to make sure that you know what's on these. If your credit score is in the mid-600s but there's a recent repossession or bankruptcy on your credit reports, it may be more difficult to qualify for pre-approval. Knowing your credit also gives you the opportunity to do some online research and find out the rates and terms you may be able to get in your situation.
- Get your documents in order – Whether you're applying for a direct loan or a subprime auto loan, there's typically some form of documentation that's required if you have poor credit. Make sure you have proof of income, residence, and employment. In some cases, pre-approval requires that you know what you intend to purchase. This means having the year, make, model, and pricing of the car you're considering.
- Shop for the best rate – Rate shopping is a process of applying for the same type of loan with various lenders in a short period of time, typically 14 days. Rate shopping can be more difficult with bad credit because not all lenders work with people in these credit situations. However, it's still a good idea to try. When you rate shop, all credit inquiries for the same kind of loan in that two-week period only count as one hard inquiry, and have less of an impact on your credit score than if you were to apply with multiple lenders over a longer time frame.
- Consider where you're applying – Before you start applying for a direct loan with every financial institution you come across, weigh your options seriously. If you're a member in good standing at a credit union, you may want to start there, and then move on to applying with online lenders. However, if you've been with the same bank for a long time, they may be a better go-to option. Wherever you decide to begin applying for pre-approval, remember that it's only one option when you need a car loan.
Can't Qualify for a Pre-Approval?
If pre-approval isn't in the cards for you no matter how hard you've tried, don't give up hope. Pre-approval can be a great way to know what you have to work on when it comes to getting an auto loan, but it's not the only option for people with poor credit. In fact, getting a subprime car loan can be just what you're looking for.
Lenders that provide these types of loans see you as more than just a number, and know that a loan can not only get you the vehicle you need, but be your key to credit repair. If you're not sure where to turn to find a subprime lender, we want to help.
At Auto Credit Express, we work with a nationwide network of special finance dealerships that are signed up with subprime lenders who can assist people in unique credit situations. The process is easy to get started and there's never any obligation to buy. Let us help you find a local dealer – fill out our auto loan request form to get started right now!