Want to spend less on your car payments? Here’s what you need to do

More than half of Americans apply for an auto loan after picking out a car at the dealer. 

While dealer loans can be a good option for some car shoppers, if you're looking for the best interest rate on a new or used auto loan, you're more likely to save money if you get preapproved before you set foot on a car lot. 

In this article, we’ll explain what preapproval is and why it’s important to get your ducks in a row with your auto loan prior to car shopping if you want to keep your car payments as low as possible. 

Preapproval is when your credit union or bank approves you to borrow up to a certain amount before you start shopping for a car or house. That way, you not only know the amount of money you are approved to spend but you also are ready to make an offer when you find what you're looking for. 

Getting preapproved has several advantages, including: 

Locking a lower interest rate: By getting preapproved, you can take advantage of a rate discount or shop for the best rate offer, saving you money over the life of your loan.  

Having more negotiating power: When you walk into a dealership with a preapproved loan, you’re essentially a cash buyer. This gives you an edge in negotiations, helping you secure the best possible price on your vehicle.  

Knowing your budget up front: Preapproval allows you to shop with confidence and avoid the temptation to overspend. You’ll know exactly how much you can afford, including your monthly payments.  

Enjoying a more streamlined process: By securing your financing beforehand, you can enjoy a faster, smoother car-buying experience with your lender of choice, rather than whatever lender has partnered with your dealer. You’ll also spend less time dealing with paperwork and more time behind the wheel of your new car.  

Experiencing personalized loan servicing: By choosing to work with your preferred lender, you’ll have a better chance of working with the same company for the life of your loan rather than having your loan sold after it closes.  

Avoiding Hidden Fees: When you choose your own lender, you can prioritize working with an institution that prioritizes your financial well-being, ensuring there are no hidden fees or unexpected costs associated with your loan.  

After researching and selecting your auto loan vendor of choice, confirm that you can apply for preapproval and then fill out their application.  

For a credit union like CAFCU, we can provide you with a preapproval letter to bring to your dealer to show them you are preapproved for financing with your Credit Union. You can often get this preapproval letter on the same day you apply, depending on whether you apply during normal business hours. With CAFCU, we can give you your preapproval the same day you speak with a loan officer or at most within 1-2 business days of receiving all the information our lenders need to make a decision.    

Sometimes, yes. However, depending on how well you know your dealer's lending options, you'll want to know what to look for when negotiating and signing the paperwork on the spot, such as: 

Interest Rates: Getting a loan while buying your car means you’ll have to compare rates on the spot, which can prevent you from getting the best deal.  

Loan term: Be cautious of loans with longer terms. While they can lower your monthly payments, they increase the total interest paid over the life of the loan.  

Hidden Fees: Look out for any hidden fees, such as documentation fees, processing fees, or dealer preparation fees. Make sure you understand all the charges included in the financing agreement.  

Add-ons and Extras: Look for add-ons like extended warranties, gap insurance, or other products. While discounted payment protection options can be very useful (especially when provided by your not-for-profit credit union), some of these products can significantly increase the cost of your loan.  

Loan Approval Conditions: Ensure that all conditions for loan approval are clear and achievable. Sometimes, financing that seems attractive initially but comes with conditions that are hard to meet. In addition, dealer financing may be tied to specific rebates or incentives. Verify if you qualify for these and understand how they affect the overall cost of the car. 

Price Markup: Less reputable dealers can sometimes mark up the interest rate offered by the lender to make a profit. This markup can significantly increase the cost of your loan.  

Prepayment Penalties: Check if there are any penalties for paying off the loan early. Some financing agreements include prepayment penalties that can negate the benefits of paying off the loan ahead of schedule.  

Credit Score Impact: Multiple credit checks can affect your credit score. Ask your dealer to do a soft pull initially and only do a hard pull when you are committed to the financing option.  

When you take a little more time over a weekend to do your homework, you’re more likely to save hundreds or even thousands of dollars over the life of your loan when you do.