How and Why to Get a Preapproved Car Loan

The vast majority of new vehicles today are purchased with the help of an auto loan. Even among used vehicle purchases, car loans are still utilized nearly half the time. This means that if you’re thinking about buying a new (or new to you) car, applying for an auto loan is likely in your future.

Getting preapproved for an auto loan can make the car-buying process easier and faster, saving you time at the dealership and even giving you more power in your negotiations. Here’s a look at why you should get a preapproved car loan before you ever start shopping for your new ride, and how to go about it.

Why should you get prepproved for a car loan?

Whether you have a specific car picked out already or are just beginning to shop around, there are many benefits to getting preapproved for a car loan. 

You can shop for the best rates

Perhaps the biggest benefit to an auto loan preapproval is that it allows you to shop around for the best possible interest rates, on your time. As you’ll likely be getting preapproved from home—or at least before you get to the car lot—you can request rates from multiple different lenders and lending platforms, finding the one that offers the best terms and annual percentage rate (APR) for you and your budget.

Once you find the car you want, it makes sense to ask about the dealership’s financing options,  too. Sometimes the process can motivate its finance department to beat whatever rate you’ve already been offered, saving you more money. Still, even if the dealership can’t beat your preapproved rate, you’ll still be able to walk away from the purchase knowing that you saved as much money as possible.

You’ll save time at the dealership

By getting preapproved before going to the dealership, you’ll also save yourself a lot of time and headache. The car-buying process can be lengthy and arduous, even if you pick your vehicle quickly. Add in lender quotes, monthly payment options, and various interest rates from which to choose, and it gets even more complex.

Having financing in place means one less thing you need to iron out with the finance department at the close of your sale. You also don’t risk getting confused by whatever terms are put in front of you on the sales floor.

You have more negotiating power

The entire car-buying experience isn’t known for being comfortable or straightforward. You may encounter salespeople who haggle prices or try to throw in surprise costs. They may also try to talk prices to you in terms of monthly payment rather than total vehicle cost.

If the dealership is the one managing your funding, it’s easy to get confused and end up  overpaying for your vehicle. Walking in with your own loan in place  makes it more difficult for salespeople to bamboozle you in the negotiating process and forces them to talk in terms of total price. 

You’re not limited to any specific seller or lender

When getting preapproved for an auto loan, you can both shop around with various local lenders and apply through loan platforms that work with multiple lenders at once. This allows you to see rates and terms from a number of potential financial institutions, so you can make the most informed decision.

Once preapproved, you’re not locked into thet loan. You still have the option to get funding information from the car dealership’s partner or in-house lenders, so you can choose whichever one makes the most sense for your situation. 

How to get preapproved for a car loan in 7 steps

Interested in getting preapproved for an auto loan? Here’s how the process works.

Determine (roughly) how much you need

Unless you’ve picked the exact vehicle you want to buy and gotten a complete out-the-door price—including taxes, title, license fees, warranty costs, delivery charges, etc.—you probably don’t yet know exactly how much you’ll need to borrow with your new auto loan. However, you can at least get a ballpark figure that you can use for loan preapproval.

Most lenders will preapprove you for a certain amount over your requested loan, in case you choose a different vehicle, add coverages, or encounter unexpected costs. Still, based on your budget and preferences, you should be able to guess how much you’re willing to spend on your new vehicle within $5,000 to $10,000 or so.

Find a few lenders offering preapproval

Not all auto lenders allow for loan preapproval, but many do. You can shop around online for offers, find a loan marketplace, or even consider financial institutions you already use (such as your everyday bank) to figure out where to apply first.

Decide when you’re (almost) ready to buy

Some lenders will offer loan preapproval without a credit inquiry, but many will initiate a hard pull in order to provide you with the most accurate loan offers. These inquiries can lower your credit score, so it’s wise to start applying only when you’re actually ready to buy a vehicle. 

The newest credit scoring models take “rate shopping” into account, which means that you can apply for multiple loans in a specific period of time, usually 14 to 45 days, but only have those individual inquiries calculated against your credit score once. As long as all of your loan applications fall within that window, the impact on your score will be minimized.

Start applying

You know how much you need to borrow, have a list of potential lenders in mind, and are ready to begin shopping for a car. It’s time to start applying for loan preapproval.

Each lender will have its own process. Many lenders offer an online preapproval that can take just minutes to complete. Others will require you to call or even visit a local branch to process the loan application. 

Provide any necessary information

You’ll need to provide each lender with certain personal information, such as your name, contact info, date of birth, Social Security number, address, and the amount you wish to borrow. You’ll likely have to agree to a soft or hard credit inquiry as part of the process, so the lender can get a better idea of whether you qualify. 

Choose the best lender

Once you’ve been preapproved and received certain loan offers, it’s time to evaluate them all and pick the best one. Be sure to look at factors such as:

• How much the lender is willing to finance.
• What your required down payment will be.
• What repayment terms are available (how long you’ll have to repay the loan).
• Which interest rates you’re offered.

This will allow you to determine which loan is the most cost-effective and what you can realistically afford.

Print your preapproval certificate

Once you’ve chosen a lender, you can often print out a loan preapproval certificate to take with you to the dealership. This certificate includes the lender’s information as well as the loan amount you’re preapproved to borrow. You can then give this certificate to the dealership, which will forward the vehicle information and total cost, so it can get paid and you can finalize your loan.

Key Differences: Auto loan preapproval vs. prequalification

Throughout your loan shopping experience, you may come across the word “prequalified.” This is different from being preapproved for a loan, though the two terms are often confused for one another. In fact, some lenders may even use them interchangeably, further leading to confusion.

Getting prequalified for an auto loan is generally a much more informal process. You may only need to provide the lender with certain personal and financial information, such as your income and monthly housing expenses, which will then be used to calculate a potential loan offer. There isn’t usually a credit check involved, so there will be no impact to your score, though you’ll often only be given an estimated loan amount.

A preapproval, on the other hand, is a conditional loan offer. While it’s still subject to change, it is based on information offered by both the borrower and the credit bureaus. Getting pre-approved may affect your credit, but it will also give you access to potential funding offers, including loan terms and interest rates.

Here’s how Connexus Credit Union, based in Wisconsin, explains the differences.

How to increase your chances of getting preapproved

Here are some ways you can boost your chances for preapproval and make the process go smoother.

Know what you need

Before you ever start shopping around, spend some time calculating what you need and can realistically afford. Take your budget, vehicle preferences, income, existing debt, and debt-to-income ratio (DTI) into account. 

Have your information ready

Lenders will need certain personal information, such as your name, date of birth, address, phone number, and email address. You may also be asked for your Social Security number—especially if you’re looking to get a preapproved auto loan—and financial information, such as your housing expenses and income. Having all of this info available and at the ready will make the application process faster.

Make sure your credit is in a good place

You should also look at your credit score, as this may limit which lenders will preapprove you. You now can request a free copy of your full credit report from each of the three credit bureaus (Experian, Equifax, and TransUnion) every week by visiting AnnualCreditReport.com. (This is the only government-approved website, so be careful of look-alikes.) Once you have the reports, search them for any errors, such as late payments that were actually made on time, accounts you don’t recognize, and incorrect balances. 

You can also track your credit through any number of free credit scoring apps and platforms, including Experian and Credit Karma. Your bank or credit card may even offer this. While these aren’t likely to be the exact same credit scoring models used by lenders, it’ll give you a rough idea of where you stand.

Experian CreditWorks℠

View Offer

Experian CreditWorks℠

Brand name

Experian

Monthly fee

Free

Credit scoring model used

FICO

Identity insurance

N/A

Tips for negotiating your auto loan using preapproval

Walking into a car-buying transaction with an auto loan preapproval gives you an advantage. Instead of being at the complete mercy of the dealership or seller, you can use this preapproval as a negotiation tool.

Only negotiate in terms of the final price

If the dealership is the one offering funding, it may speak to you in terms of a monthly payment rather than your vehicle’s total price. If it can meet your monthly payment needs, the deal may sound good,  but your total cost could prove higher than it should be.

If you have your own funding offer, you aren’t reliant on the dealership’s lender(s). You can focus on negotiating the total purchase price instead of being trapped into confusing dealer pitches about how much the car will cost per month. This way you know exactly how much you’re paying in the end and why.

Negotiate price, not loan terms

Some dealerships will use your interest rate as a negotiating tactic. If you already have a loan preapproval, you have more control over what’s being negotiated and what that actually means for your out-of-pocket cost. Instead of accepting the dealership’s offer for a lower rate, smaller down payment, or longer repayment term, you can focus on things such as purchase price and warranty package.

Get a better rate

Once you have settled on a purchase price and shaken hands with your salesperson, it’s time to go to financing. The dealership has incentives for getting you to fund your purchase with one of its own lenders, so you may be able to snag a better rate or repayment terms at this time. Even if you have your own preapproved lender, you can still entertain any loan offers the dealership is willing to give you.

Sometimes the dealer loan can beat your existing offer’s interest rate. Even if it’s only by 0.25% or 0.50%, that’s money saved over the life of your loan. Or even if it’s able to match your existing offer, it may be willing to offer you a break somewhere else (discounted warranty, free service, etc.) for choosing its lender. You come out ahead either way.

TIME Stamp: Auto loan preapproval gives you a decided leg up in the purchasing process

Getting preapproved for an auto loan is the best way to go into any car-buying experience. It gives you a good idea of how much you can afford to spend, what you’ll pay monthly, and what you qualify for based on your income and credit score. Getting preapproved is usually a quick process that can often be done online, and you can even shop around with multiple lenders to get the best deal.

Frequently asked questions (FAQs)

How does preapproval for a car loan work?

Preapproval is a conditional auto loan offer based on certain information and credit inquiries. This offer provides you with a loan amount, terms, and interest rate, as well as giving the vehicle’s seller confirmation that you are conditionally approved for funding.

How long do you have before a preapproval letter on a car loan will expire?

Each lender has its own expiration on preapproval letters, which may range from 30 to 60 days, on average. As long as you purchase an eligible vehicle within that time frame, and no huge changes have occurred to your credit or financial situation, the funding offer is generally valid. It’s important to note that the actual terms of the offer can change, such as the interest rate you were offered, especially if you wait too long to buy.

When is the best time to get credit preapproval for a car loan?

You should get preapproved for an auto loan shortly before you’re ready to start vehicle shopping. Most credit scoring models allow for rate-shopping within a 14-to-45 day period, so all the inquiries received within that time frame only count against your credit score as a single inquiry. Getting preapproved shortly before buying also ensures that you have the most up-to-date information regarding interest rates and loan terms for which you’ll qualify.