An auto loan preapproval is a conditional approval in which a lender declares they are willing to extend financing, up to a specific price point, to help you purchase a car.
Having this preapproval allows you to shop around for cars with a loan amount guarantee in hand so you have a better idea of your price point and the dealerships know you’re more ready to buy. Without a preapproval, even if you find a great car, you might not get the best deal on a loan.
Prequalification vs. Preapproval for an Auto Loan
Getting approved for an auto loan starts with getting prequalified, if it’s available. Prequalification and preapproval are similar, but not interchangeable.
Prequalification: This is the fiirst step in which you provide your personal credit and financial information with a lender without triggering a hard credit check. A lender will either deny you or accept your details, moving forward with a preapproval. If your information is accepted, you’ll see what your proposed terms could be, including how much you can borrow and the interest rate. It’s not an agreement to fund a loan, but is a pathway toward doing so.
Preapproval: A preapproval is a loan application that has been approved. You’ll complete an application, trigger a hard credit check to verify your credit details, and see loan information to share with potential dealerships. The lender will make an offer letter for a specific amount that will last about 90 days unless something drastic changes your credit, such as applying for a home loan or a credit card during that time.
How to Get Preapproved for an Auto Loan
Having a preapproval on hand gives you the power to walk into a dealership and get the car you want without the overhead or stress of having to haggle at the dealership for financing. Conversely, it can sometimes help you negotiate for better financing terms at the dealership (more on that below). You can get preapproved by:
- Checking your credit. Before you complete an application, check your credit score and fix any errors or work on ways to improve your score, if needed. The better your credit score, the better your chances of securing an auto loan preapproval and getting the lowest interest rate available.
- Gather your documents. In general, the lender will ask for your legal identification, like a driver’s license; an employment and income status verification; your current expenses and debts; and your credit history. You can speed up the preapproval process by having this information ready before applying. You might need to include recent tax documents, employer W2s, bank statements or other forms of verification.
- Compare lenders. You can apply for loan preapproval several times within a 14-day period, and it will only cause one hard inquiry on your credit report because the credit bureaus will identify it as rate shopping when it’s related to the same product purchase. Complete a few applications so you can compare offers, both from online options and your personal banking provider. If you already have a vehicle in mind, you can include this in your preapproval application.
- Head to the dealership. With your best preapproval letter in hand, you can go to a dealership to browse vehicles that fit your budget. Once you’ve found a car, you can complete a loan application. Keep in mind that some lenders have limitations on what vehicles they will and will not finance. Before you complete a preapproval, you should know what those restrictions are, which are usually based on the age and mileage of a vehicle.
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How To Shop for a Car After Preapproval
With preapproval in hand, you know exactly how much car you can afford. Before you head into a dealership, you might want to explore cars in your given price range by searching online. Many dealerships list inventories on their websites, giving you a chance to view cars and prices from home.
Once you see which car is a good fit for your budget and needs, you can head to a dealership for a test drive. If you’re not an in-person shopper, you could skip the dealer visit altogether and buy your car entirely online.
Once you’ve found the best fit, your car salesperson will move you along to a finance manager. Keep in mind there is room for some changes before finalizing the financing and driving off the lot with your new car. For instance, your terms can change from three years to five, which might give you a different interest rate than what your preapproval stated.
Tips for Negotiating Using an Auto Loan Preapproval
Your preapproval letter not only provides a proof to the auto dealer that you can get financing, it also helps you better negotiate with the dealership’s financing office to leverage all sorts of extras or reduce hidden costs such as:
- Extended terms: Your dealership might offer you a longer term loan that what you’re preapproved for so you can lower your monthly payments by spreading it out longer. This does mean you will likely pay more in total interest over the life of the loan, but you don’t have to accept the offer.
- Lower your interest rate: Most dealerships work with multiple lenders at their financing office and can essentially shop rates for you. Sometimes, this means they can offer you a lower rate than what you initially had in your preapproval terms.
- Expensive cars: Some dealers might want to talk you into buying a more expensive car than one you can afford, based on your preapproval limit. Remember, your letter says the amount you’re preapproved for, and you can tell the dealership that’s your fixed amount, or work with them on negotiating a better deal for you.
Even if you don’t go with the financing option at the dealership, It’s always good to ask what they can offer. You don’t have to commit to the dealer’s offer or even to the lender who offered the original preapproval if you find a better deal.
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