Car loan pre-approval: How does it work?

author-avatar By on March 19, 2021
Car loan pre-approval: How does it work?

Car loan pre-approval can give you a serious leg-up in the buying process, and can also lead to some serious savings.

What is a pre-approved car loan?

A pre-approved car loan is an indication from a lender that you are eligible to apply for a car loan of a specified amount, having assessed your credit rating, liabilities and assets. Entering a car dealership with car loan pre-approval can help speed up the car buying process, as both parties are aware of what you have to spend.

Pre-approval isn’t a guarantee of the loan itself, so you’ll still have to contact the lender again (whether that’s online, over the phone or in a branch), for settlement. But it can be a good way to get ahead of the game and fast-track your way to a funky new set of wheels.

In the market for a new car? The table below features car loans with some of the lowest interest rates on the market.

What are the benefits of car loan pre-approval?

A pre-approved car loan can be beneficial in that it grants you the power of knowing what you can afford before you go out to buy a car. For example, if you’ve been pre-approved for a $20,000 loan, you’ll limit yourself to cars within that price range. Dealers won’t try to tempt you with a more expensive car, as they’ll also know you have a set budget.

Having this knowledge and confidence in yourself and your ability to secure the affordable car you want can also give you an edge in negotiating the sale price of the vehicle. Without pre-approval, you may be at the mercy of persuasive car dealers whose job it is to squeeze as much money out of you as possible. Even if you’re strong-willed, that intoxicating new car smell can sometimes override your better judgement!

Also, car dealers often push their own dealer finance options, so if you have a pre-approved car loan the dealer may offer you finance at an even lower rate. Just make sure you take into account all other costs too (like car loan fees) before you agree to either dealer finance or a loan. 

Pros of a car loan pre-approval

  • A fixed budget to shop with
  • Faster buying process
  • Less chance of getting a dodgy deal
  • Greater negotiating power (on car and interest rate)

Bear in mind too that you aren’t locked into any one lender after they’ve pre-approved you. If you aren’t happy with the limit you’ve been set, then you can try talking to another.

What are the drawbacks?

Pre-approval isn’t available to everyone. After looking at your history and credit score, some lenders might not deem you an acceptable customer for pre-approval, which can be demoralising.

Let’s say you do qualify for pre-approval though – what could be bad about knowing that you’ve been approved for a certain amount? Well, for one thing, that amount might not be enough for the car you had your heart set on, and can lock you into a certain subset of vehicles (unless you decide to get a loan from a different provider, which you’re entitled to do).

Pre-approval also doesn’t last forever. The industry standard length is between one and three months, with three being the most common. There are plenty of lenders who only offer pre-approval for one month, although in some cases you’ll be able to renew it a further 30 days.

Cons of a car loan pre-approval

  • Not available from every lender
  • Not available for every car – some cars over a certain age won’t qualify
  • You’ll have a limited time to choose a car. Some people like to take their time before committing to such a big financial decision
  • You could be disappointed with the amount of money you’re able to borrow

Car loan pre-approval: Frequently asked questions

1. Am I eligible for a car loan?

Your eligibility for a car loan will depend on a variety of factors such as: the car model, whether the car is new or used, the lender and the loan you're applying for, your income, your credit rating and history, your assets and liabilities, and your history of savings. Having a bad credit rating doesn't disqualify you from getting car loans, but you might find it harder to get a good one.

2. Can I apply for a car loan with bad credit?

If you have bad credit, you can boost your chances of being approved for a car loan by: being realistic in your expectations & picking a modest car, being honest in your application, save some money beforehand, obtain stable employment, and clean up existing debts. Also work towards improving your credit history beforehand by paying bills and credit card repayments on time.

3. What are the differences between secured & unsecured car loans?

secured car loan is one where an asset (the car you’re buying) is used as collateral against the loan, and can be reclaimed by the lender if repayments aren't met. Unsecured car loans do not use your car as security. Secured car loans are generally less risky for lenders to provide than unsecured car loans, so they often have lower interest rates.

4. How to get a low interest car loan?

There can be many ways to get a low-interest car loan, but one of the best ways could be to maintain a clean credit history. This tells lenders you're a trustworthy borrower, making them more likely to give you a good interest rate. Also, don't forget to shop around to see which lenders are offering the lowest rates. Secured car loans also tend to have a lower interest rate than unsecured loans.

5. Do pre-approved car loans offer better interest rates? 

Pre-approved car loans may give you access to better interest rates, but they aren't a specific type of loan and don't offer lower rates or fees themselves. This will come down to the type of loan you qualify for and the lender it's with. 

As of 2021, the average interest rate for a secured car loan is about 7% p.a, while for unsecured loans the average rate is just over 10.50% p.a, according to Savings.com.au research. The lowest interest rate for secured car loans is 3.97% p.a, and the highest is 17.99%. 

For unsecured loans, the minimum and maximum available is around 4.99% p.a and 20.25% p.a.

Savings.com.au's two cents

If you're in the market for a set of wheels, then there's no harm in seeking pre-approval from a lender first. This can not only help you narrow your search, but it can be a time saver as well, while also potentially securing you a better loan if you play your cards right. 


Photo by Simon Rae on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Great Southern Bank, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
  • If you click on a product link and you are referred to a Product or Service Provider’s web page, it is highly likely that a commercial relationship exists between that Product or Service Provider and Savings.com.au

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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