Getting Auto Loan Preapproval or Pre-Qualification

The terms “auto loan preapproval” and “auto loan pre-qualification” are often used interchangeably, but they aren’t the same. Still, both preapproval and pre-qualification can be valuable tools to help you plan for a car purchase and financing.

When you pre-qualify for an auto loan, you typically provide less information upfront. Lenders use a soft inquiry to obtain limited credit information about you, which won’t affect your credit scores. Pre-qualification shows you a rate estimate and the amount you might be able to borrow, but it’s less of a commitment from the lender and loan details may change.

Auto loan preapproval can be considered a step up from pre-qualification. Lenders use a hard credit inquiry — which can slightly lower your credit scores — but the preapproved loan rate and details are less likely to change. Because of the impact to your credit scores, it’s best to not seek preapproval until you’re serious about buying a car.

When a lender advertises auto loan pre-qualification or preapproval, it’s always a good idea to ask whether they will use a soft or hard credit inquiry before you apply.

Ways you can use car loan pre-qualification or preapproval

Whether you get pre-qualified or preapproved for a car loan, both can help you answer some basic questions before you start car shopping.

Can you get approved for an auto loan? If you have any doubts about being approved for a car loan, applying for pre-qualification or preapproval can indicate whether you’ll qualify for an auto loan at all. It can also help you identify and address any obstacles to getting a loan.

How much will you be able to borrow? Pre-qualified and preapproved car loans show a maximum loan amount, so you’ll know if it’s enough to finance a car and the general price range.

Most auto lenders offer pre-qualification or preapproval, and some offer both. In many cases, the applications are available on the lender’s website. With pre-qualification, you’ll usually see estimates within minutes.

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What are the benefits of auto loan pre-qualification?

Auto loan pre-qualification with a soft credit check is most helpful in the early stages of loan research. It’s a way to gather general information without affecting your credit scores, but it isn’t an approval of credit. The estimates you receive in a pre-qualified loan offer are likely to change after a lender completes a full credit check. Here are some of the ways you can use pre-qualified loan information:

See rate estimates. Get a general idea what interest rates are in the current market, as well as what rate you can anticipate when applying for an auto loan. Use these estimates in an auto loan calculator to try out different terms and payment scenarios.

Decide whether to apply. When you pre-qualify, lenders usually show you an APR and monthly payment for your loan amount. Also, they typically show how the payment changes with different loan terms, along with the total interest you’ll pay for each. This information can help you decide whether to move forward with a loan, before your credit scores are affected.

Narrow lender choices. When you apply to pre-qualify for an auto loan with several lenders, you get an idea of their interest rates for comparison. This can help you narrow down where you want to actually get preapproved or apply for a car loan.

What are the benefits of car loan preapproval?

Auto loan preapproval makes more sense when you’re certain that you want to apply for an auto loan. Usually, the lender does a hard credit inquiry which will temporarily lower your credit scores. This gives the lender more information to determine your likely loan rate and amount.

Like pre-qualification, preapproval isn’t a firm offer of credit, but a preapproved loan offer is less likely to change than a pre-qualified loan. Here’s how a preapproved auto loan can help you.

Set a realistic car-shopping budget. When you get preapproved for a car loan, the lender will show you how much you can borrow, so you can use this information to set a ceiling for car price. When you find a car that you want, add any taxes and fees to its list price. You can estimate by adding 10% to the list price. Deduct any down payment or trade-in amount, to see if your final figure falls below your preapproved loan amount. If not, you might need to look for a less expensive car. Just know that you aren’t committed to spending the full preapproved loan amount.

Determine monthly car expenses. The best time to know whether a car will fit your budget — with some breathing room — is before you buy the car. Since a preapproved car loan gives you an idea of the monthly payment amount, you can use that and a total car cost calculator to figure in insurance, gas and maintenance. If your total monthly expenses will stretch your budget, you might need a less expensive car or to put off buying one.

Get the best loan rate possible. When you bring preapproved auto loan offers to a car dealership, it enables you to see if the dealership can beat your preapproved rate. Often, dealers have access to financing through “captive lenders” — the auto financing arm for car manufacturers — which can offer lower rates than other lenders. Also, dealers usually work with other lenders to provide auto loans, with a predetermined interest rate for different credit scores. Lenders often have an agreement with dealers that they can mark up your interest rate — as much as 1 or 2 percentage points. Having an auto loan preapproval can help you judge whether the dealer is offering you a fair rate.

Strengthen your negotiating position. With a preapproved car loan, you’re transformed into a “cash buyer” at a car lot, putting you in a stronger negotiating position. When you bring a maximum monthly car payment to the table, you can avoid a common car dealer practice of focusing only on the desired payment amount and extending a loan term to get there (which costs you more in total interest). Instead, you can tell the dealer you want to focus on the vehicle’s out-the-door price. If you have a car to trade, knowing the value of your trade-in will put you in a stronger position at the dealership, too.

Deflect auto dealer upsells. As you’re closing the deal and signing papers in a dealer’s finance and insurance office, you can use your car loan preapproval to deflect add-ons and extended warranty offers that you don’t want. Just say: “I’m preapproved for this amount, and I’m not going to go over it.”

Where to apply for a preapproved car loan

Banks and credit unions are more likely to offer auto loan preapproval, and you can typically apply online, over the phone or in person. If you already have a relationship with a bank or credit union, you might get a better rate by applying there.

Aim to get preapproval from two or three lenders so you can pick the best interest rate, but submit all of your preapproval applications within a 14-day timeframe. If multiple lenders make a hard credit inquiry within a short time, it will count as one inquiry and have less impact on your credit scores. It’s also a good idea to check your credit reports afterward to ensure there aren't any errors.

What you need to get preapproved for a car loan

Applying for preapproval is similar to filling out an application for a car loan, and some financial institutions may require more information than others. Here’s what you (and any co-applicants) should have ready when you apply:

• Personal information, such as your name, date of birth, contact information and Social Security number.

• Housing details, such as your address, how long you’ve lived there, whether you rent or own, and your monthly housing payment.

• Income and employment information, such as your gross annual income, employment status and employer’s name, if applicable.

• Loan details, such as your how much and how long you want to finance.

• Trade-in information, if applicable, such as the title and registration of your vehicle.