Loan Pre-Approval – What It Means and Why It Matters for Car Buyers?

Buying a new car can be an exciting time.

You might be thinking about what sort of model might suit your needs and lifestyle, and imagining yourself zipping around in your new wheels.

But it can be tricky to go car shopping when you’re not totally sure what you’re able to spend.

That’s where loan preapproval comes in.

What is Loan Pre-Approval?

When you are preapproved for a car loan, it means a lender has said it’s willing to lend you up to a certain amount of money.

There might be some criteria to tick off once you know which vehicle you’re going to buy, but it gives you clarity around your budget.

When you settle on the car you’d like to buy, you can progress to final approval.

The pre-approval process in New Zealand (step-by-step)

• Application: First, you’ll need to submit an application online with the better finance™ team.

• Documentation required: You’ll need to provide some documentation to support your application, typically including identification, proof of address and proof of income.

• Credit check: A credit check is likely to be conducted to check how creditworthy you are.

• Conditional approval: Then, if you meet the lender's criteria, you’ll be given a conditional approval to start shopping for your new vehicle.

How Does Loan Pre-Approval Work for Car Buyers?

It’s a good idea to get your preapproval application underway relatively early in the process.

This will give you the peace of mind to find a great vehicle and negotiate a price that you know will work for you.

Preapproval generally lasts up to three months.

Key Benefits of Getting Pre-Approved

There are a number of real benefits to being preapproved for your car loan.

• Know your budget: You’ll know how much you can afford to spend – no guesswork required.

• Strengthening your negotiating power: You’ll have the loan virtually ready to go, which can put you in a good position if you need to negotiate with car dealers or private sellers. There won’t be doubts over your ability to afford a vehicle.

• Faster, smoother purchase process: Much of the application process will have been dealt with, so the step to final approval should be quicker.

• Reducing the risk of disappointment: When you’re preapproved, you’ll know the sort of price range to start shopping within. This means there’s less chance of falling in love with a vehicle that turns out you can’t afford.

• Time to find the right loan: We can use the preapproval process to work with you to determine which lender and loan terms are likely to be an appropriate fit for you.

What Lenders Look For During Pre-Approval

Lenders assessing a preapproval application are likely to look at a number of things.

Credit score and history  

A higher credit score generally improves your chances of approval, but lenders also consider your affordability and overall financial situation. It could be a good idea to get a copy of your credit history and check that everything listed is accurate – and that there’s nothing there that might be a concern.

Proof of income and employment

Lenders need to know you’ll have enough income to pay off your loan. Being able to show you have a consistent income, and where it comes from, will be important.

Debt-to-income ratio

Lenders will also look at what other debt you have and how that compares to your income, to ensure you’re not over-committed.

Deposit/down payment

The bigger your deposit, the smaller your loan may need to be. A bigger deposit can be a positive factor in an application, but it is not always essential.

Other factors

Lenders may also consider things like your level of assets and whether you might need someone to act as a guarantor for you.

Common Myths About Loan Pre-Approval

There are a few myths that you might have heard about preapproval.

“Pre-approval guarantees I’ll get the loan”

Preapproval gives you a good idea that a lender will be willing to give you a loan, but it’s not a guarantee. The lender will usually need to approve the particular vehicle you’ve decided to buy, and may need to check that your financial situation hasn’t changed since you made your application.

 “Applying for pre-approval will hurt my credit score”

Making a lot of applications for credit can affect your credit score, but at better finance™ we take a targeted approach that will limit the impact.

“Pre-approval locks me into a single lender”

If you decide that you’d rather apply to a different lender once you have preapproval in place, that’s no problem. You’re not committed.

Steps to Get Pre-Approved for a Car Loan in New Zealand

• Find the right lender: The team at better finance™ can help find a lender who will be a suitable fit for your needs and individual situation.

• Gather necessary documents: You’ll need to provide proof of address, proof of residency, identification and proof of income.

• Complete and submit your application: Our online application system makes the process straightforward.

• Wait for assessment and conditional approval: This might not take as long as you expect!

• Review your pre-approval offer: We can talk you through the terms and conditions of your pre-approval so you fully understand it.

What to Do After You’re Pre-Approved

Now for the fun bit…

Once you’re preapproved, you can go shopping for vehicles within your approved budget.

You can negotiate with confidence and finalise your loan once you’ve settled on a car. If you’re wondering how to sell a car with finance still owing, this guide has everything you need to know.

At settlement, the money will be transferred to the seller, and you’ll be able to drive off in your new car. If the car you are buying will also be security for the loan, you will need to have full motor insurance in place for your car before the loan is drawn down.

Tips for Improving Your Chances of Pre-Approval

Want to give yourself a higher chance of preapproval? Here are a few things to think about…

• Check and improve your credit score: If your credit score isn’t as high as it could be, you might be able to increase it by being diligent about paying bills on time. New Zealand has a comprehensive reporting system, which means that good behaviour boosts your score. Correcting any errors can also help.

• Reduce existing debt: Paying down other debts may make you more attractive to lenders.

• Save for a larger deposit: Having more money of your own as a deposit could make your application stronger.

• Avoid major financial changes before applying: It’s usually important to be able to show a solid income history. If you’re expecting big changes in the near future, it might make sense to hold off on your car purchase until they have passed.

Frequently Asked Questions (FAQs)

• How long does pre-approval last?

  It depends on the lender, but typically anything from one month to three months. If you don’t find a car in that time, you can reapply to have your preapproval extended.

• Can I get pre-approved for a used car?

  Yes – the team at better finance™ can talk to you about how this works.

• What happens if I change my mind or the car costs less/more?

  You don’t have to use the full amount that you’ve been preapproved for. If you discover you need more than your preapproval, you could resubmit your application. We can help you look at your options.

• Is pre-approval free?

  Yes. There may be fees attached to the loan, but these will not be payable until you actually take out the loan.

Ready to buy a car?

If it’s time you got on the road, get in touch with the team at better finance™ today. We’re personal loan experts who can help you through any stage of the process.