One of the most overwhelming aspects of buying a new car or truck is trying to figure out how to pay for it. Not only is it a huge financial investment, but it seems like everywhere you turn there are car loan advertisements, and of course dealerships offer their own financing. With such an array of options, it can be easy to find yourself wondering just how much car you can afford and if you’re getting a good deal. Getting a pre-approved loan can help.
Understanding why a pre-approval may help
Getting pre-approved for your car or truck loan eliminates the guesswork for you. A preapproval simply means that you’ve applied for your car loan and have been approved for a set amount at a specific interest rate before you buy your car or truck. This gives you the benefit of knowing exactly how much car you can get before you even start shopping. Having this knowledge saves you the time of looking at vehicle options outside of your budget.
For example, let’s say you’re approved for a $20,000 car loan. You know that your car search should be limited to cars or trucks that are $20,000 or less. Keep in mind that this amount should include applicable taxes and fees.
Getting preapproved for your car or truck loan means you know exactly how much you’ll be able to spend, saving you time by allowing you to narrow your search.
How Much Can I Afford?
A pre-approved loan sets your loan amount, your term and your interest rate, meaning you’ll know exactly how much your monthly payments will be. Knowing your monthly payment helps you determine just how much car you can afford.
If you’re approved for a certain amount and the monthly payments for that amount are more than you can afford, then you know you should look for a car or truck that costs less than that amount. In other words, you do not have to spend the entire amount that you’re pre-approved for, and if you can’t afford the payments, you shouldn’t. In the same example, if you’re approved for a loan for $20,000 but the payments are too high, you are not obligated to use the entire $20,000. You can speak to your financial institution about a longer term to potentially lower the payments, but the bottom line is you shouldn’t put yourself in an unstable financial situation for your new car or truck.
According to the Fed, auto loans are the third biggest percentage of accounts in serious delinquency. Avoid making yourself part of this statistic by budgeting carefully for your next vehicle.
*Data sourced from the Center for Microeconomic Data’s Q3 2018 Household Debt and Credit Report
When you’re calculating how much your new car or truck will cost, don’t forget to include things like:
- Regular maintenance. What will oil changes cost for your new car or truck? Are there other additional maintenance charges you will need to budget for?
- GAP insurance. Is this protection something you’re going to add?
- Gas. How many miles do you typically drive? Will your gas expenses be more with your new car or truck?
- Insurance. Contact your carrier to see if your insurance premium will increase with your new car. This is also a great time to shop around to see if you can find a more competitive rate.
In order to know how much you can afford as a monthly loan payment, you’ll need to build a solid budget that captures all of your income, and all of your expenses. Doing so will give you the clarity you’ll need to determine how your new loan payment will impact you financially. Need help budgeting for your monthly payments? Download our free budget tool.
Does A Pre-Approval Hurt My Credit?
A pre-approval means that you have applied and been approved for a loan. Because your financial institution cannot approve you for a loan without running your credit, this will show up as an inquiry on your credit report; in other words, it is what’s known as a “hard hit”. A single inquiry may not have a huge impact on your score, but if you “shop around” for offers over an extended period of time, such as 45 days, it could result in a further reduction in your credit score. It’s best to shop for your loan within a 1-2 week time frame.
Pre-approval is not the same as pre-qualification. Pre-qualification results in a “soft hit” and does not impact your credit score. However, pre-qualification does not guarantee that you will be approved for your loan, and even if you are pre-qualified for your car or truck loan you will still have to go through the application process.
Applying for a car loan, including applying for pre-approval, doesn’t have to be complicated or overwhelming, and gives you the buying power you’ll need when shopping for your next car or truck.
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