No, you do not have to get pre-approval, but it can save you some time knowing that your bank or institution has already pre-approved you for a set amount of money.
1. Bank or Credit Union
Decide on whether you will make an application at your bank or credit union. Some people prefer banks while others prefer credit unions. Hopefully, you will have a relationship with one or both of these institutions. If you have a relationship with both institutions, then you have a few options. You will need to do some homework.
2. Interest Rate
Part of your homework will include finding out which institution offers the lower interest rate, because then you possibly can save yourself some money. So the interest rate is very important.
3. Debt-to-Income Ratio
Do you have an idea of how much that you can afford to spend? You need to do more homework. You can have an idea of this before going to your institution. Total all of your monthly bills and subtract that amount from your monthly income. Do you have any money left over or are you living paycheck to paycheck? Hopefully you have money left over. To discover your debt-to-income ratio divide your bill amount by your monthly income to see what your ratio is. Most institutions like you to fall somewhere around 36% or lower. Hopefully you are in that bracket. If not do not worry, you can possibly consolidate payments or devise a plan to pay off most of your bills before getting pre-approval. When you apply for your pre-approval, the institution will do a debt-to-income ratio. They also, will do a credit check on you.
Below is a debt-to-income ratio calculator that will calculate for you, if you do not want to calculate it yourself.
4. What type of vehicle or house?
Once you have done the debt-to income ratio and discovered that you are in good condition for pre-approval, decide what type of vehicle or house that you want. Know in advance how many months that you want to finance the loan for. Again, you need to do more homework. Possibly the type of car or home that you want is more than you can afford. You can search the internet to see the possible car or vehicle that you have in mind. Decide if you want a 2-door or 4-door car. Decide how much you want to spend for a car or for a house. Do you want a 3 bedroom house? Do you want a 2-car garage? Do you want a lot of land? These are just a few questions to consider and ask yourself.
Now you can apply to your bank or credit union. You can do this online or go into the institution. Some find it more convenient to apply online. Generally, if you have done your homework, when you apply for the preapproval you will have an amount in mind such as $15,000, $25,0000, or more or less. The bank will take your application and let you know if your are pre-approved. Once pre-approved, then you can go car or house shopping. The loans are generally good for 30-60 days. When you find the vehicle or house that you want, just call your instituion with the information.
If you have excellent credit, sometimes the business that you are applying to may want you as a customer and offer you a lower interest rate. If this happens, you now may be in a position to negotiate. Tell your credit union that you have a lower offer. Ask them if they are willing to match it. If your credit union or bank wants your business, most likely they will match it, if not you have a choice to go with the other business. Remember you want the lowest interest rate. You want what is best for you.
You can and should call your insurance company and give them an idea of the vehicle that you might be looking for. They will give you an idea of what the insurance will probably be on it. This is important because insurance costs could go up or down and you need to know this.