Why You Should Get an Auto Loan Pre-Approval
7 MIN READ
Published January 18, 2024 | Updated January 30, 2024
Before you start shopping for a new vehicle, getting a pre-approval for an auto loan can give you a clear idea of how much you can afford to spend. With your budget clearly set, it’ll be easier to make the right choice at the dealership.
More importantly, a pre-approval allows you to negotiate better and is an incentive for dealerships to match or beat the rate. It allows you to compare your options and get the best terms to minimize the financial burden of car debt.
What Is a Pre-Approved Auto Loan?
A pre-approved auto loan is a financing offer you can get from a lender before you purchase a car or refinance. While you don’t get the funds when you get preapproved, the offer shows you how much money you qualify for, the interest rate, and the terms of the loan.
When you have an auto loan pre-approval, it tells the dealership that you’re qualified to purchase, which can give you an upper hand in negotiations. It’s important to remember that preapproval is conditional and not a guarantee for a loan. You’ll still need to submit a formal application to get the loan.
Are You Eligible for a Pre-Approved Auto Loan?
The requirements for getting a pre-approval auto loan are similar to a formal loan application. The lender will determine if you’re eligible for the loan based on a number of factors, such as:
- Your income information
- Debt-to-income ratio for car loans
- Personal information, such as name, contact details, and Social Security number
- Residence information
- Loan information, such as the amount you want to borrow
- Your credit score
“Getting a pre-approval for an auto loan gives you the information you need to know what you can afford,” says Teresa Dodson, debt expert and founder of Greenbacks Consulting. “It also gives you the power to negotiate,” Dodson adds.
Benefits of Getting a Pre-Approval for an Auto Loan
While it isn’t necessary to get an auto loan pre-approval, there are a number of benefits to doing so.
Know Your Budget
We recommend knowing your budget before you head to the dealership so you can make better financial decisions. A pre-approval can tell you exactly how much you can afford to spend. Follow the 20/4/10 rule, which recommends a 20% down payment, a maximum term of four years, and total car costs, including car payments and insurance, not exceeding 10% of your income.
Grow Your Negotiation Power
When you have a pre-approved car loan, you’re in a better position to negotiate with the dealer because it shows that you’re serious about purchasing. Knowing the maximum car loan payment will also allow you to make an informed decision.
You’ll be able to focus on the out-the-door price of the vehicle, and with knowledge of your current car’s trade-in value, you’ll be in a stronger position to get the best possible car price and terms.
Save Time and Money at Dealerships
If you haven’t taken the time to shop around, a dealership can take advantage of you. Dealers work with a number of lenders and have a pre-arrangement that allows them to add a mark-up to your interest rate, which is usually 1 to 2 percentage points.
When you have pre-approval for an auto loan, you’ll be able to save money at the dealership, knowing whether they’re offering you a fair price. You’ll also be saving time having all your financing options on hand to compare before you make a final decision.
4 Steps To Obtain a Pre-Approved Auto Loan
Knowing how to get pre-approved for an auto loan and what you’ll need will provide you with a smoother car-purchase experience. Start by checking your credit score to see whether you’ll qualify with a prime lender or you’ll need to apply for a car loan for bad credit.
1. Research Lenders
Start by looking into different lenders that offer pre-approved auto loans. While you’ll get a clear idea of the loan rates, terms, and fees they offer when you get a pre-approval, it’s also important to check customer reviews of each company and the incentives and rebates they offer.
Getting a pre-approval will cause a temporary drop in your credit score. You can minimize the impact by submitting all applications within a 14-day window, so it’ll be counted as a single hard credit pull.
2. Gather Necessary Documents
Simplify the car buying process by making sure you have all the necessary documents ready before you apply. Lenders will typically require these documents:
- Identification proof
- Proof of address
- Employment information
- Social Security number
- Income information
- Tax documents
3. Complete the Pre-Approval Application
You’ll be able to apply for pre-approved car loans online by filling out an application form and submitting your documents. If you’re applying with a credit union or bank, you can also apply in person or over the phone.
Once you’ve determined how you’d like to apply, complete the application form with your details, attach your documents, and submit it.
4. Wait for the Pre-Approval Decision
You’ll find details about the pre-approval process and timeframe on the lender’s website. Typically, online applications are processed within a few minutes, so you should be able to receive a decision quickly. In-person applications at banks and credit unions can take a few days. Pre-approved offers are usually valid for 30-60 days.
Once you have auto loan pre-approvals from different lenders, you can compare them and pick the best offer. You’ll need to submit a formal application to finalize your loan.
Auto Loan Preapproval vs. Pre-Qualification
|Provides a rough estimate of how much you can borrow
|Provides a more accurate picture of how much you can borrow and at what rate
|Involves a soft credit check
|Involves a hard credit check
|Doesn’t provide leverage in negotiations
|Holds more weight in negotiations
Auto loan pre-qualification involves a soft credit check. It isn’t a loan offer but an estimate of the loan terms you can expect. Pre-qualification doesn’t impact your credit, and it’s also not as helpful if you want to use it to negotiate.
An auto loan pre-approval involves a hard credit check, which can impact your credit. The lender will check your credit history, income, and other details to provide you with an accurate estimate of the loan terms you qualify for. A pre-approval is more useful if you want to negotiate with a dealer.
Get a Pre-Approved Car Loan
You can get a car loan pre-approval from a bank, credit union, or an online lender. Online lenders, such as myAutoLoan, are typically able to offer better rates to borrowers with good credit because they don’t have the overhead costs of banks and credit unions.
If you’re already a member of a credit union, such as the Navy Federal Credit Union, it’s usually a good idea to apply there first because of the perks members usually get. We recommend getting at least three pre-approvals so you can compare them to get the best possible deal. Take your pre-approval to a dealership and see if they can beat the rate.