Getting pre-approved for a car loan is a useful step when trying to buy a car. While most dealers prefer that you use their lender, getting pre-approval from your bank or other lenders gives you more leverage to negotiate a better rate for your vehicle. The pre-approval process can be confusing, so here is a guide to help you through it:
Check Your Credit Score
Your credit score is the major deciding factors lenders consider when it comes to auto loan approval. Good or bad, you should have an idea of your credit score before applying for pre-approval. Canadians are allowed one free credit report from Equifax or TransUnion each year, so be sure to order yours before you start auto loan shopping. You will be able to secure a better rate if you have a high credit score. If your credit score is bad, at least you will understand why your rates are higher and can budget accordingly.
Once you know your credit score, you can start to research rates you can expect from lending institutions. You can check your bank’s website, or call them to ask about their auto lending rates. You should also call all other banks and credit unions in your area to see if they have better rates. If you have good credit, you can expect to pay between 4-6% in interest. But, if you have bad credit that is 620 or lower, expect to pay closer to 15% on your auto loan. This huge difference is why it is essential to know your credit score and shop around before deciding on a lender.
Decide on a Budget
Now that you have an idea of what amount institutions are willing to lend you and at what interest rate, you can decide on a reasonable budget. Generally, you do not want to spend more than 25% of your monthly income on transportation costs. That includes car insurance, fuel, and loan payments.
Prepare Your Documents
You will want to get your documents in order before you head to your chosen financial institutions for loan pre-approval. They will perform credit and background checks for you and also want proof of employment among other things. Have these papers in hand when you go in:
- Proof of address
- Employment history
- Proof of employment
- Proof of income
- Financial info regarding current debts
Proof of employment and income are especially important if you have bad credit – without these, you are unlikely to get approval.
Shop Around Quickly
Choose your top two to three institutions and discuss pre-approved options with them. Ask about repayment terms, loan amounts, and interest rates. If you receive a better offer from elsewhere, let them know, and they might try to beat it. Do your shopping around within 14 days so that your credit score does not get hit too hard. Each credit inquiry by a financial institution can have a slightly negative impact on your score; however, inquiries performed within 14 days are grouped as one.
Typically, pre-approval takes about 24 hours and is valid for 60 days, but there can be exceptions. If you are ready to finance a car and want access to the best car finance rates, contact Canada Wide Vehicle Finance. We can do the shopping around for you so that you end up with a great deal.