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Applying For a Car Loan Before Visiting a Dealership

Applying For a Car Loan Before Visiting a Dealership

Buying a new or used car is one of the biggest purchases many Canadians will make. With the average price of a new vehicle now over $40,000, it’s essential to make sure you get the best possible deal.


One of the smartest things you can do before visiting a dealership is to get preapproved for auto financing. Getting preapproved simply means going through a soft credit check and application process with a lender before you start shopping.


This gives you estimated loan terms, monthly payments, and the amount you’re likely to be approved for based on your credit and income. It takes much of the uncertainty and stress out of the buying process.


In this comprehensive guide, we’ll cover the benefits of getting preapproved, how the process works, using your preapproval at the dealer to negotiate, and tips for avoiding potential traps and getting the best deal.


Whether you’re buying new or used, getting preapproved can save you money and give you important leverage and confidence when dealing with high-pressure salespeople.

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What is Car Loan Preapproval?

A car loan pre-approval is when a lender does a preliminary check to see if you qualify for an auto loan before you start shopping for a vehicle. It’s not a final loan approval, but rather gives you an estimate of the loan amount, interest rate, and terms you may be eligible for based on a soft credit check.

Here’s how getting preapproved for a car loan typically works:

 

  • You apply for pre approval with a lender by submitting information like your income, debts, and Social Security number.
  • The lender does a soft credit check which doesn’t affect your credit score.
  • You receive a preapproval letter estimating the loan amount, APR, down payment, and monthly payments you qualify for.
  • The preapproval letter is good for a set time, usually 30-60 days.
  • When you find a vehicle, the dealer runs your credit again and the lender does a hard credit check.
  • If approved, you receive a final loan offer that may have different terms than the preapproval.

 

The key difference between a soft and hard credit check is that a hard check can temporarily impact your credit score by a few points, while a soft check has no effect. Preapprovals use soft checks so you can shop around without hurting your credit.

 

Benefits of Getting Preapproved

Getting preapproved for a car loan before visiting the dealership offers several key benefits:

 

Know Your Budget and Potential Payments

Preapproval provides an estimate of the loan amount, interest rate, and monthly payments you qualify for based on a soft credit check. This allows you to set a realistic budget and know what you can comfortably afford before falling in love with a car that’s out of your price range.

 

Gives You Negotiating Leverage

Walking into a dealership with a preapproved loan in hand puts you in a stronger negotiating position. The dealer will know you already have financing lined up, so they’ll be more motivated to beat the terms of your preapproval and earn your business.

 

Can Lock In Lower Interest Rates

Interest rates offered by lenders fluctuate frequently. Getting preapproved locks in the rate you’re quoted for a set period, often 60 days. This protects you from potentially higher rates later if market rates rise.

 

Shop Multiple Lenders

Applying for preapprovals from several lenders allows you to compare loan terms and interest rates. This ensures you find the most competitive financing before stepping foot in the dealership.

 

Speeds Up Buying Process

Having a preapproved loan in place speeds up the financing process at the dealer. There’s no need to fill out applications and wait for approval once you’ve selected the car you want. The dealer just needs to verify your information for the preapproved loan.

 

How to Get Preapproved in Canada

Getting preapproved for an auto loan in Canada is easy with just a few steps. Here’s how to go about it:

Start by researching different lenders and options. The major banks like RBC, TD, Scotiabank, CIBC, and BMO all offer car loan preapprovals. Credit unions and online lenders like LoanAway and RateHub are also good options.

Make sure you have the required documents ready before applying. This usually includes government-issued ID, proof of income through recent pay stubs or T4s, proof of address, and your social insurance number.

Before applying, it’s a good idea to check your credit score and report. This gives you an idea of what interest rates you may qualify for. You can get free credit reports from Equifax and TransUnion.

Applying for preapproval is quick and easy, and you can do it entirely online, over the phone, or by visiting a branch. Just go to the lender’s website or call to begin the application process.

To get the best deal, make sure to get preapproved quotes from at least 3 different lenders. This allows you to compare interest rates and loan terms side-by-side.

 

Using Your Preapproval at the Dealer

Bringing a preapproved car loan to the dealership gives you important negotiating leverage to get the best possible deal. Since you already have financing lined up, you hold the upper hand and won’t be at the mercy of the dealer’s financing offers. This puts pressure on the dealership to beat the rate and terms you’ve already secured.

When the dealer runs your credit application, make sure to emphasize that you already have been preapproved for an auto loan. Ask them directly if they can beat the interest rate you’ve been offered from your lender. Many dealerships have relationships with lenders and access to special rate programs they can extend to creditworthy buyers.

If the dealership does come back with a better rate offer, make sure to scrutinize the rest of the loan details before agreeing. Sometimes dealers will offer a slightly lower interest rate but charge higher fees elsewhere in the loan. Carefully compare the Annual Percentage Rates (APRs) between the two offers to see the true cost difference.

Additionally, be wary of a dealer trying to load up your loan amount with overpriced extras and accessories you don’t really want. Since you entered negotiations with a preapproved amount in mind, you can refuse charges for things like extended warranties, fabric protection, and rust-proofing sprays. This gives you greater control to only pay for the vehicle itself and any options you actually need.

Finally, if the dealer is unable to beat your preapproved offer, don’t be afraid to walk away. You can let the salesperson know that you will shop around at a few other dealerships and see if they can provide more competitive financing terms. With a preapproval in hand, you have the flexibility to negotiate with multiple dealers to find the best deal possible.

 

Watch for Changes After Purchase

One thing to keep in mind after you’ve used your preapproval to purchase a vehicle is that some of the agreed-upon terms can change once the dealer runs your credit and finalizes the paperwork.

While you may have a preapproved rate and monthly payment through your bank or lender, the dealer will likely submit your information to their own financing partners as a final step. This additional credit check could result in the interest rate, loan length, or monthly payment changing from what you were originally quoted.

Make sure to scrutinize the final loan documents carefully before signing anything. Look for differences in the interest rate, loan length, fees, trade-in value, and monthly payments compared to your preapproval terms.

If there are significant changes to the deal structure or price that don’t match your preapproved terms, don’t be afraid to speak up and negotiate to get it as close as possible to the original agreement. You can even walk away and reapply elsewhere if the dealer is unable to match what you were preapproved for.

The key is ensuring you only pay the agreed-upon fees and interest rates from your initial preapproval. Don’t let the dealer sneak in extra costs you didn’t consent to just because the process is nearing the finish line.

 

Compare Rates From Multiple Lenders

One of the biggest advantages of getting preapproved for an auto loan is that you can compare rates and terms from multiple lenders. This allows you to find the best overall deal before you even step foot in the dealership. Here are some tips for comparing car loan offers:

Compare rates from different banks, credit unions, and online lenders. Traditional banks and credit unions typically have competitive rates and you can apply in person. Online lenders offer fast approvals but may have higher rates. Get preapproved from 3-5 different places.

Look at different loan terms – longer terms mean lower payments but more interest paid over time. Make sure to compare rates for same length loans.

Consider the total cost of the loan including all fees. Some lenders charge no origination fees while others add hundreds of dollars in fees. Calculate the total amount you’ll pay over the full loan term.

Choose the lender with the best overall deal for your situation. Getting the lowest rate may not matter if the fees are excessive. Find the right balance of rate and fees for your budget.

Having multiple preapproved offers gives you negotiating power at the dealer. Make them try to beat the rate your bank offered you. Shopping around leads to big savings.

 

Improve Your Credit Score First

One of the best ways to secure the lowest interest rate on your auto loan is to improve your credit score before applying. The higher your credit score, the lower the rate lenders will offer you. Here are some tips to boost your credit score quickly before getting a car loan preapproval:

 

Better credit means better rates – In general, you can expect much lower rates with a score over 720, so aim for this threshold if possible. Even small score increases can mean big interest savings.

 

Review credit reports – Make sure your credit reports don’t contain any errors negatively impacting your score. Get free reports from Equifax and TransUnion and dispute any mistakes.

 

Pay down debts – Pay off credit cards and other debts to lower your credit utilization ratio, which is a key factor in credit scores. This can provide a quick boost.

 

Become an authorized user – Ask a family member with excellent credit to add you as an authorized user on a credit card. This can improve your score fast.

 

Dispute errors – If you find mistakes on your credit report like accounts that aren’t yours or incorrect balances, dispute them with the credit bureaus to fix your score.

 

Calculate How Much You Can Afford

Before even thinking about getting preapproved, you need to determine your budget and how much car you can realistically afford. Rushing into a car loan without thinking through the full costs is a recipe for being underwater on your loan or stuck with payments you can’t handle.

Here are some tips for calculating the right budget when buying a car:

 

  • Consider your down payment amount – The more you can put down upfront, the lower your monthly payments will be. Have at least 10-20% of the vehicle price ready as a down payment.
  • Determine a monthly payment you’re comfortable with – Look at your current income and expenses. Choose a payment that fits within your budget, even if interest rates rise.
  • Factor in insurance, gas, and maintenance – Beyond just the car payment, you need to budget for higher insurance premiums, gas costs, and maintenance fees on a newer vehicle.
  • Choose the right loan term – Longer loans (5-6 years) mean lower payments but more interest paid over time. Find the right balance for your budget.

 

Having a clear budget and price cap based on what you can realistically afford will set you up for success when navigating the preapproval and auto financing process.

 

New vs Used Car Loan Differences

When it comes to financing a car purchase, there are some key differences between getting a new car loan and a used car loan that you need to consider:

 

New Car Loans

 

– New car loans tend to have lower interest rates – lenders consider them less risky

– Down payments are usually lower for new cars, in the 5-10% range

– Loan terms can be longer for new cars, up to 8 years

– Monthly payments are higher due to new car depreciation and higher sticker prices

 

Used Car Loans

– Interest rates are typically higher for used cars which are seen as riskier

– Used cars require larger down payments, usually 10-20% of the price

– Loan terms are shorter for used cars, normally 3-5 years

– Monthly payments can be lower for used vehicles with cheaper prices

 

The choice between new and used comes down to weighing cost savings vs. peace of mind. Used cars are more affordable but new cars offer reliability and lower maintenance costs. Evaluate your budget and needs to decide which option better fits your situation.

 

Watch Out For Dealer Financing Traps

One of the biggest risks of using dealer financing is getting trapped into a bad loan. Dealers make a lot of their profit from financing, so they will use high-pressure sales tactics to get you to use their lending offers. Be very cautious of the following common dealer financing traps:

 

Pressure to Use Dealer Financing – Salespeople will strongly push their own financing offers and make it seem like you have no other options. Don’t fall for this. Remind them you are preapproved elsewhere to get better leverage.

 

Added Fees – Dealers love to tack on extra fees for documentation, processing, etc. Make sure you only pay the agreed loan amount and interest rate, refuse additional unnecessary fees.

 

Pushing Extras You Don’t Need – They will try to upsell you on extended warranties, service plans, insurance and other add-ons. Be firm and only agree to what you actually need.

 

Marking Up Interest Rate – Even if they match your preapproved rate, dealers often markup the interest by 1-2% and pocket the difference. Check your loan documents carefully.

 

Read All Terms Carefully – Don’t just glance at the numbers, scrutinize the fine print. Check for differences between verbal promises and what’s on paper before signing anything.

 

Shopping Tips for Getting the Best Deal

When you head to the dealer armed with your preapproved car loan, you gain significant negotiating power. Here are some smart shopping tips to ensure you get the absolute best deal on your next vehicle purchase:

 

Bring Your Preapproval to Negotiate

Let the dealer know upfront that you have been preapproved for an auto loan. This immediately puts pressure on the dealer to beat the interest rate and terms you already have locked in. Be firm that you will only consider their financing offer if they can beat what you’ve already been approved for.

 

Don’t Reveal Your Payment Amount

If the dealer asks what monthly payment you are approved for, try not to reveal the exact amount. This gives them room to manipulate numbers and trick you into a higher payment. Simply say you have been preapproved for a competitive rate and are satisfied with the monthly payment.

 

Beware Low Monthly Payment Tricks

Dealers may counter your preapproval with an offer that has a lower monthly payment. But this could be masking a higher overall interest rate or longer loan term. Carefully scrutinize the full terms before accepting a deal solely based on lower monthly payments.

 

Be Ready to Walk Away

If the dealer is unwilling to beat your preapproved rate and terms, don’t be afraid to walk away. This shows the dealer you have other options and are serious about only accepting the best offer. Many times, they will call you back with a better deal rather than lose a sale.

 

Avoid Peak Shopping Times

Try not to shop for a car at busy times like weekends or holidays when dealers have lots of customers. Go during slower times and dealers will be more motivated to make a deal. Bringing a preapproval gives you even more leverage during slower sales periods.

 

Alternatives to Auto Loans

While getting a traditional auto loan is the most common way to finance a car purchase, there are some other options to consider:

 

Saving up to pay with cash

Paying cash upfront for a used car allows you to avoid interest charges and monthly payments. If you have enough savings, paying in cash can be the most cost-effective option. Start saving well in advance and buy from private sellers to potentially get the best deals.

 

Using 0% financing deal

Some dealerships or manufacturers offer 0% financing promotions, allowing you to finance your purchase interest-free over a set term. This can be a good option if you qualify, but read the fine print for any hidden fees.

 

Borrowing from family/friends

Asking a relative or friend for a personal loan may allow you to get a low or no interest car loan. Draw up a formal agreement and make sure to stick to repayment terms to avoid ruining the relationship.

 

Using credit card

You may be able to charge part or all of a car purchase to a credit card, allowing you to earn rewards. But interest rates are usually much higher than auto loans. Make sure you can pay it off quickly.

 

Leasing instead of buying

Leasing a new car often requires lower upfront costs than purchasing, but monthly payments are higher. Make sure to understand lease terms and restrictions before committing.

 

Conclusion

Getting preapproved for a car loan before visiting the dealership can be extremely beneficial in getting you the best possible deal.

Here are some key takeaways:

 

  • Preapprovals allow you to shop interest rates from multiple lenders to find the best terms
  • Knowing your budget and monthly payments ahead of time prevents overspending
  • Bringing a preapproval gives you leverage to negotiate the final price and loan terms
  • Getting preapproved locks in lower interest rates in advance
  • The preapproval process speeds up the final approval at the dealer

 

When negotiating with the dealer, make sure to insist they try to beat your preapproved interest rate. Refuse any unnecessary fees or add-ons you don’t want. If the dealer is unable to match your preapproved terms, continue to shop around.

Getting preapproved before stepping foot in the dealership gives you the upper hand to secure the best possible auto financing. Do your research to find the most competitive rates and shop confidently knowing the monthly payments you can afford.

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Questions About Applying For a Car Loan Before Going to a Dealer

In Canada, it is often beneficial to apply for a car loan before visiting a dealership. Doing so allows you to secure financing ahead of time, giving you greater negotiating power at the dealership. Here are 20 frequently asked questions about getting pre-approved for auto financing in Canada:

Yes, getting pre-approved for an auto loan before visiting dealers is highly recommended in Canada. Pre-approval lets you know how much you can afford and allows you to negotiate the final price of the vehicle from a position of strength. With rates and terms locked in, dealers will often discount vehicles further to win your business.

The best places to get pre-approved for a car loan are your bank, credit union, or an online lender. Compare rates and terms across multiple lenders to find the most competitive financing offer before heading to the dealer.

To get pre-approved, lenders will need information like your annual income, employment details, monthly housing payments, other loan payments, assets, liabilities, and your credit score. Having all required documents ready speeds up the pre-approval process.

Benefits include knowing your budget, power to negotiate the best price, faster deal finalization, assurance that financing is secured, potential to get better rates/terms, and avoidance of dealer financing markups.

When you apply for pre-approval in Canada, the lender performs a hard credit check which can temporarily lower your score by a few points. However, responsible use of credit can build your score over time.

Most Canadian lenders offer rate locks on pre-approvals for periods between 30 to 90 days. This gives you enough time to find the right vehicle. Verify expiry dates and ensure your credit profile remains unchanged.

Yes, you can certainly negotiate rates and terms on a pre-approval in Canada. Leverage competing offers to see if your lender can beat another rate. Having a great credit score also boosts your negotiating position.

No. A pre-approval essentially reserves funds for you and locks in terms. But you are not obligated to complete the loan. If the dealer offers superior financing you can cancel the pre-approval.

 

Most dealers will happily accept a pre-approval letter from a reputable lender like a bank. It makes the purchase process easier on them as your financing is secured. But they may still try to beat your pre-approved rate.

 

Do not reveal details like the rate/term you’ve been pre-approved for. Also keep the exact loan amount private. This gives you an advantage in negotiating the best possible deal.

You can request the lender to raise your pre-approval limit if the vehicle is slightly above the initial amount. If the gap is large, you may have to cancel the existing pre-approval and reapply for a higher amount.

Yes. Once you leverage your pre-approval to negotiate the best price on the vehicle, you can certainly use any savings towards extras like auto insurance, extended warranty plans, rust protection, or accessories.

Be wary of tactics like suggesting you apply for dealer financing to ‘see if they can beat your rate’ and then pressuring you into accepting a higher rate. Politely but firmly insist on using your cheaper pre-approval.

The dealer will need a copy of your pre-approval letter. You finalize paperwork like the bill of sale, select warranty coverages, and sign loan documents. The dealer sends all paperwork to the pre-approval lender who transfers funds to complete purchase.

If there is a surplus between your pre-approval amount and final vehicle cost, the lender will simply adjust the loan value downwards. This reduces the amount you repay over the loan term. No need to reapply for pre-approval.

Experts recommend keeping your exact pre-approved rate private. If they know your rate, dealers may intentionally offer a slightly better deal to win your business but it still may not be the best financing possible.

 

Politely ask the dealer for full transparency on the rate, term, fees, restrictions etc and get terms in writing before deciding. Also contact your pre-approval lender and give them the chance to beat the dealer’s offer.

If you were pre-approved for a specific car model but change your mind, you can simply reach out to the lender and provide updated vehicle details. They will adjust the loan application to the new vehicle as long as it’s a similar value.

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