Should I get an auto loan before going to the dealership?

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If you’re in the market for a new or new-to-you vehicle, working out the financing before you go to the dealership will give you time to explore your options and discover the best auto loan rates. Applying for your auto loan before going to the dealership will also put you in a better position to negotiate and ensure you’ll secure the best financing deal.

Why it’s better to get financing before going to the dealership

When you apply for a car loan before going to a dealer, you have a better chance of getting the best loan terms, including more competitive rates.

You may qualify for more favorable terms

Dealerships shop your loan around to partner lenders or work with a captive finance company. A dealership may mark up its rate a few percentage points above the average auto loan rate for your credit range. This is a big reason why getting outside financing before you visit the dealer saves you money. Essentially, you are receiving a wholesale rate from a lender rather than paying an extra fee for a middleman — the dealership.

Start with the bank or credit union you already have an account with. If you have an open account in good standing, it may offer you a relationship discount or more favorable terms.

You can avoid surprises

Your rates depend on your credit score and overall financial health. When you prequalify — and then apply for preapproval — for an auto loan, you can see what rates you qualify for. If you have poor credit, you can also take time to improve your score before you borrow to ensure you’re getting competitive terms.

You can preview your monthly payment

You can calculate your monthly payment based on the amount and rates you are preapproved for. This will allow you to find a monthly payment that works best for you based on different loan terms.

Many lenders offer terms between 24 to 72 months — though terms of 84 or even 96 months aren’t unheard of. That being said, a longer loan term may decrease your monthly payment, but you will end up paying more in interest over the life of your loan.

It strengthens your negotiating position

Not only will having a preapproval offer help you find a vehicle that fits your budget, but it will also strengthen your negotiating position. A dealership’s finance office may be willing to beat your preapproval offer to lock in your business. In addition, it could help you negotiate the vehicle’s price or other terms of your loan.

How to arrange auto financing in advance

To get the best auto loan rate, you will need to determine your budget and put in the time to research both your car options and the right lender for your finances.

1. Set your budget. You should always check your credit and calculate the monthly payment you can afford before you apply for any loan, including an auto loan.
2. Check your credit. Checking your credit score will give you a heard state on knowing what rates you’ll qualify for and what lenders offer the best rates for your score range.
3. Prequalify with multiple lenders. Prequalifying for a loan lets you preview your rate. Many lenders offer prequalification without a hard credit check, which makes it easy to compare quotes.
4. Research your vehicle. Sources like Kelley Blue Book and Edmunds let you check average costs in your area. They can also help you estimate maintenance, fuel and car insurance costs to give you a better idea of your budget.
5. Lock in your rate. Once you’ve compared lenders and know the type of vehicle you want, apply for preapproval to lock in your rate. This will put you in a strong negotiating position at the dealership.
6. Check the dealer’s offer. While dealerships don’t offer the best rates in general, you may be able to negotiate a better rate. With a preapproval offer in hand, see if dealership financing beats your rate or has better terms.

What to do if you can’t get financed in advance

If you are unable to get all your ducks in a row ahead of vehicle purchase, consider the following.

• Dealership financing. Often, dealership financing is one of the most accessible options if you have a bad credit score. Because dealers work with a wide variety of lenders, they may be able to find you financing even if you don’t qualify with more traditional lenders.
• Online dealers: Online dealers like Carvana are also more open to borrowers who don’t meet more strict eligibility criteria. In general, opting for a used car rather than a new car will mean a more affordable monthly payment and a potentially lower interest rate, even if you don’t have the best credit.
• Delay your purchase: It may be better to wait if you don’t need a car in the immediate future. Interest rates can be extremely high if you have bad credit. And while you can always refinance your auto loan at a later date, taking the time to improve your credit now may mean scoring a lower rate out of the gate.

The bottom line

Arranging your auto loan before going to the dealership is the right course of action for most people. Not only can you still opt for dealership financing, you may be able to reduce some of the stress of car shopping.