Why Should You Get Preapproved for a Car Loan?
A preapproved car loan helps you prepare for the expenses of a car purchase. Preapproved loans are widely available through banks, credit unions, and online lenders.
Getting preapproved prepares you for the car purchase. A preapproval helps you:
Know What You Can Afford in Advance
When purchasing a new vehicle, whether brand-new or pre-owned, you need to establish how much you can set aside for a monthly car payment. Compare different rates and terms across lenders to find options that suit your budget before going to a dealership.
Learn more about the best car loans currently on the market.
Eliminate Loan Qualification Stress
Securing a preapproval lets you concentrate on the car purchase, giving you peace of mind about the financing.
Plus, you instantly become a more attractive buyer. Sales staff will recognize you as a serious and qualified customer, giving you a leg up in price negotiations.
Avoid Potentially Inflated Rates
"Car dealerships operate on notoriously thin margins on the vehicles themselves," says Ben Michael, founder and attorney at Michael & Associates, who has handled many cases involving auto accidents. "Many discounted models are, in fact, being sold at a loss, but dealers either need to clear space on their lot or risk further depreciation if they don't sell soon.”
To bolster margins, dealers turn to in-house maintenance services and financing deals, which often include added interest and other fees, Michael says. That’s why it’s beneficial to get financing directly from a bank before you arrive at the dealership.
“In many cases, this can be an effective bargaining tactic to get the dealer to offer you the same or even better terms, but if that doesn't work, you can always fall back on that bank loan," Michael says.
Car Loan Preapproval vs. Prequalification
Though preapproval and prequalification sound similar, the two processes are only distantly related.
Preapproval is a formal loan offer from a lender, where they check your credit and financial statements and give you the loan you requested or qualify for. With preapproval, you become a cash buyer and can purchase a vehicle right away.
Prequalification is an informal process that gives you a rough estimate of the loan you may qualify for based on what you say about your income and credit history. The lender only verifies these details once you formally apply for a loan.
Here are the key differences between preapproval and prequalification.
Preapproval
Approval of a loan, including the amount, term, and rate
Obtained online or in person
Application process requires detailed income information supported by recent pay stubs or wage and tax statements (form W-2)
Lender uses a hard inquiry to pull your credit report
Generally not restricted to a specific vehicle or vendor
Prequalification
Usually obtained online
Application relies on the information you enter without initial verification
Lender uses a soft inquiry to pull your credit report
Tells you what you may qualify for but doesn't guarantee approval
Estimated rates may change after your details are verified
Getting Preapproved for a Car Loan: A Step-by-Step Guide
Getting preapproved for a car loan is a multistage process that includes the following steps:
1. Check Your Credit
Check your credit report. You can access this information for free once a year at AnnualCreditReport.com. Many banks, credit unions, and credit card lenders also provide access to your monthly credit score from at least one of the major credit bureaus, Equifax, Experian, or TransUnion. Some may even allow you to access a version of your credit report.
Identify and correct discrepancies or errors in your credit report to potentially improve your credit score and secure better loan terms. Disputing credit report errors can take several weeks, so initiate this process before beginning your car search.
2. Get Your Documentation Ready
To get preapproved for a car loan, you need to provide the following details and documents:
Full name
Social Security number
Current address
Monthly house payment and whether you own or rent your residence
Current employer
Current monthly income
A recent pay stub, W-2, and possibly complete income tax returns
The current vehicle you own and any financing on it
The loan amount you’re applying for
The lender may also request details about the vehicle you plan to purchase, such as its make, model, year, and estimated mileage if you’re buying a used car.
3. Compare Lenders
When seeking preapproval for a car loan, compare offers from at least three or four lenders. Contact a bank or credit union with which you already have a relationship, and then expand your search to other financial institutions and companies specializing in auto financing. Consider online lenders, too.
Never assume that a loan offer from one lender is the best you can get. Auto lending isn’t standardized, so offers can vary significantly from one lender to another.
4. Submit Your Application
Most lenders have online applications, but if you prefer a face-to-face interaction, apply in person with a local lender.
5. Secure Approval
You can get approval on the same day unless you’re purchasing a specialty, high-end sports, or luxury vehicle. Request your preapproval in writing, as you’ll need to present a formal document at the dealership.
Make sure you know when the preapproval expires to avoid needing to reapply. Though timelines may vary, approval usually lasts between 30 and 60 days.
Getting Preapproved
To get preapproved, check your credit, gather your papers, look at different loan offers, and apply. With preapproval, you can shop at multiple dealerships without reapplying for financing each time. You can also secure more favorable loan terms and rates.
Learn more about the top offers by reading our comprehensive reviews of leading auto lenders.
