How to Get Preapproved for a Car Loan

Auto Loans, Loans
How to Get Preapproved for a Car Loan — and What to Do Next

It always feels better to know you’re getting a good deal — especially when you’re financing something as pricey as a car. That’s why it’s smart to get preapproved for your auto loan before you go car shopping.

Getting preapproval means the lender — a bank, credit union or online auto loan provider — has reviewed your information and determined a loan amount and rate you’re likely to receive. Here’s how to get preapproved for a car loan and what to do once you have a good offer.

How to apply

Depending on the lender, you can apply for preapproval online, in person or over the phone. To evaluate your application, lenders generally complete a hard credit check, which will lower your credit score slightly. Based on your credit and income information, the lender might make you a loan offer, including an interest rate, monthly payment, loan amount and loan length.

Some lenders also offer pre-qualification. This process generally doesn’t affect your credit score, but the results are less likely to be accurate because the lender hasn’t examined your creditworthiness as closely.

Rate shopping

When shopping for the best rate, you don’t have to worry about additional dings to your credit score. Multiple hard inquiries made within a certain period — usually 14, 30 or 45 days — register as only one.

However, if you rate shop, you might be contacted by multiple lenders or dealers. Check lenders’ privacy policies, and if you’re worried about getting overwhelmed by calls and emails, create a new email account and sign up for a free Google Voice phone number that you can use on loan applications.

Nerdy tip

Apply to multiple lenders to find the lowest rate and best terms possible. Use an auto loan calculator to compare how different offers change your monthly payment and the amount you’d spend on interest.

The offer statement

If you’re preapproved, the lender will provide an offer statement. This can take various forms, such as a:

  • Blank check with set credit limit
  • Certificate
  • Letter
  • Code for online activation

You don’t have to commit to an offer to start shopping, but do bring the offer statement to the dealership. And remember to check your offer for restrictions. The lender might not finance specific car makes and models, or the offer might apply only at certain dealerships.

Negotiating

When you negotiate your car deal, focus on the price and trade-in value first. If the salesperson asks about financing, you can reply, “I’m preapproved and will be paying in cash.” Once you’ve agreed on the price, try not to disclose your preapproved interest rate at least until you’ve heard the dealership’s offer. A dealership might offer 9%, even if it could offer 8%, if you reveal too quickly that you’re currently approved for 10%.

Before you accept a dealership’s lower interest rate, ask about the monthly payment and loan length. You’ll likely want to take dealership financing only if the interest rate is lower and the term is equal to or shorter than the one on your preapproval.

Finalizing your loan

If you go with dealership financing, you can simply forget about your preapproval. You’re not obligated to accept a preapproved offer, and it will eventually expire.

If you do use your preapproved offer, a representative from the dealer might contact the lender to initiate the funding. Otherwise, the dealership will create an “option contract” which states that you are financing with the dealership but have an option of financing with another lender within a set number of days. These contracts are quite common, and as long as your lender sends the money within that time, there’s no problem. Simply provide your lender the contract and vehicle identification number to start the process.

Either way, you’ll drive away with your new ride, confident that you got a good rate on your car loan.

Getting the best loan you can

Comparing offers from banks, credit unions and online lenders ensures you get the lowest interest rate, and walking into a dealership with financing puts you in a much stronger negotiating position. Plus, you’ll have a better chance of finding a good auto loan even if you have less than perfect credit.

Nicole Arata is a staff writer at NerdWallet, a personal finance website. Email: narata@nerdwallet.com.