What is a car finance pre-approval?
A pre-approval is a lender giving you ‘in principal’ agreement to lend you a certain amount of money for a car. It is finance that is put in place prior to purchase, rather than choosing the car, then seeking the finance
Shopping (research) vs buying
When buying a car, most people will research the car first, test drive. A high proportion of people decide on a car (or at least narrow to the brand and model), test drive, decide, then look at finance. Is it the right way to do it?
Car buyers when looking to upgrade their wheels spend around 59% of the total time of the process researching the car. (Autotrader). On average shoppers take around 108 days from start to finish, so 63 days is spent thinking about the car itself, prior to even setting foot in a dealership.
Usually, the next step is to head into the dealership and test drive. The moment you step into a dealership, you begin to match wits with car salespeople and their finance department. Unless you are a cash buyer, the only barrier to the sale in the mind of the car salesperson is how you are paying for the car. (it’s usually one of the first questions they ask!)
They want you to buy even though you may still be researching. After all, that’s their job. There is a saying in the car industry. “Getting the customer behind the wheel, sells the steel”. They hope that you fall in love with the car and gain emotional attachment. They get you in front of the finance and insurance person to then help close the deal. I mean, why not do it all in one place? It is convenient, and you feel great when you are approved, even though it may not be the best deal you can get.
Apart from not getting the best deal you could get if you spent more time researching the finance, when you engage dealership finance, the only restriction usually placed on the contract of sale is ‘subject to finance’. This means if you are approved, you are going to have to buy that car or potentially face a cancellation fee. You have just moved from shopping to buying in one fell swoop.
The finance and insurance department
A lot of people go into a dealership with a loose budget in mind. It could be a repayment budget or a car spend budget. What tends to happen is the dealership finance person focuses solely on the repayments and whether you can afford just that, rather than the total cost of ownership (everything it costs to run a car) They are skilled at it. It allows emotion to creep in and the budget head you may have brought into the process quickly goes out the window. It is not your fault, it is the way humans work.
Data shows that when buying a car, customers thinking about the finance only takes place in the last 14 days of the process. The finance (or the way you are going to pay for the car you love) is as important as the car you are choosing.
Why is the finance research so important?
Remember that finance involves interest. That is, you borrow the amount you are paying for the car at a certain rate, then there is interest to be paid on top. This can be thousands or 10’s of thousands of dollars depending on the finance deal you get. Doing your research on finance is important to the overall cost of the car you want.
How do you research finance?
It can seem daunting but there are basically a few types pathways in the automotive marketplace*.
- Dealer finance companies – these have direct relationship with car dealers, offering personal loans to customers to finance a vehicle purchase from the car dealership.
- Lenders – these provide the funds for the car loan. Banks, building societies, credit unions etc along with money market corporations and finance companies.
- Finance brokers – these act as an intermediary by matching borrowers to lenders and their loan products, assisting and advising borrowers on the loan application process and negotiating interest rates on loans.
(*Royal Commission – Some features of car financing in Australia)
Hard and fast: If you go through a dealer, you will most likely end up through the dealer finance company. Usually only one or two lenders so your choices are limited.
Do it yourself: If you go through the lenders directly, you will encounter having to do a lot of research yourself, comparing and speaking to lenders to find the right deal for yourself
Compare and save: A broker does this job for you. Their primary role is to match the right lender, not just to your budget, but also to your financial circumstances.
Paying cash gets a better deal?
Generally, this is true. If a dealer has a car in stock they want to move and you have cash, they are likely to wheel and deal with you.
If you finance through the dealership, or use advertised finance offers that promote low rates, you most likely will not get as good a deal.
Pre-approved finance is like cash. Walking into a dealership and being pre-approved means that you are in the drivers seat (pardon the pun).
Low interest or no interest car loans?
See those deals on TV or Facebook offering low rates? 1.99% or even 0%.
It seems too good to be true. Well, most times it is. Check the fine print!
Those deals are usually only available on specific models or variants and the dealer will not budge on the price no matter how hardnosed a negotiator you are. Looking a different model to the ones on offer? You will end up paying the standard or higher interest rate on offer in the dealership.
There also may be a honeymoon period on the rate that will expire mid-way through the loan and you will revert back to a high interest rate.
You may not be able to make additional repayments without penalty or there may be additional fees and charges or higher delivery costs.
At the end of the day, the dealership or manufacturer offering this deal is losing money on 0% as they make a lot of money from finance. Car companies will look to recoup the losses they make on the finance, one way or another.
In a lot of cases, customers found that they were worse off using these deals than they would have been if they had spent the time researching the finance.
Tips to getting the best deal
Do know your limits.. and stick to it
Pre-approvals can be up to a certain amount that you have determined suits your budget. For example, a $30,000 car may have a repayment of $400 per month, you have already added in costs like insurance, registration, CTP and maintenance and know what you can afford. If you have not done this, you may be led down a path that makes you solely focus on the repayment. When it comes time to servicing or replacing the tyres, you end up putting it on a credit card, exploding the cost of ownership of your car.
Do know your credit score
There is a direct link to your credit score and the interest rate you can get. This is your bargaining tool. If you are asset backed (own a home or a mortgage) you can also achieve a good rate with certain lenders.
Credit scores are affected by your conduct on loans.
That is; if you have a job that pays regularly, pay on-time, have no defaults and don’t make too many enquiries (shopping around with lenders) you probably have a good score. It doesn’t mean if your score is lower that you can’t get a loan, it just means your rate may be a little higher. Lenders look at risk factors and your score plays heavily into their calculations. If you have a lower score, they are taking a risk, so their ‘reward’ or the money they make from your loan is higher.
We can help you get your credit score. Contact us for more information.
Don’t confuse what you are doing
There is a difference between shopping and buying. Shopping is the research component. This is where you spend time ‘shopping around’. This could be for the car itself or the finance. When shopping around for finance, it is really important that you aren’t applying. A good broker will be able to give you a quote on a car without you having to apply. The moment you apply, you have put an enquiry on your credit file. If you do this numerous times, it can negatively affect your credit score for the future.
Don’t reveal your intentions
Buying a car is similar to a game of poker. The first person to fold will be the person that loses in most cases. Walking into a dealership announcing you are ready to buy or revealing exactly what your budget is to a dealer is allowing them to take control and to put you into something that you may not be able to afford or even a loan term or package that is unsuitable.
Don’t gamble on dealership finance
As mentioned, dealerships make money through their financing departments. Shopping around (making soft enquiries without applying) should form part of your research. Brokers have a duty to ensure that your circumstances and needs are met in the product they are offering. Brokers also make money from the finance, but the laws governing brokers are designed to ensure they are acting in your best interest.
Do get pre-approved
Going into negotiations with a dealer with a pre-approval puts you in the drivers seat. It is then up to the dealer to match or beat the finance deal you already have or to substantially discount the car to offset their potential higher finance cost. If there is no alternative plan and you walk into a dealership to both look at the car and finance, they are completely in control.
Final thoughts
Having a pre-approval in place can mean the process is quicker. In a market with low stock or limited availability, you can snap up the car you want quickly and be on the road in your new wheels sooner rather than spending a few days getting your finance sorted. It also removes the pressure and allows you to make informed decisions about the finance.
Getting pre-approved
Getting pre-approved is simple. You may know the car you want but haven’t ventured into the dealership as yet. We will work within your budget and you will know what limit you have to spend. Once you have found your car, it’s simply a matter of providing us the contract of sale and we resubmit for final approval.
Disclaimer: The thoughts and opinions conveyed on this website are those of the author/s and are of a general nature. Any information provided does not constitute financial or general advice to you from Journey Finance Australia. When considering financial or insurance products, you should seek your own independent advice from a professional.
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