Why Get Preapproved For A Car Loan?

If you can’t afford the full price of a new or used vehicle, it makes sense to pursue financing in the form of a car loan. But you don’t have to wait until you visit a dealership, car lot, or private seller to start shopping for a car loan.

Instead, you can get preapproved for financing earlier in the process and reap several benefits.

Find out what getting “preapproved” means, how it works, good reasons for doing so, and what’s involved in the process.

What does it mean to get preapproved for a car loan?

Getting car loan preapproval doesn’t quite mean you have been fully approved for auto loan financing or that you can count on receiving any funds. It means you’ve been vetted by a lender as a creditworthy borrower with preferable financials and you stand a better chance of eventually getting final underwriting approval and closing on the car loan you’ve been preapproved for.

“Pre-approval allows you to better understand your general target price range on a car and narrow the field of possibilities. Though a preapproval isn’t locked down, it can serve as a handy guidepost for knowing what credit is available to you while you are hunting for a car,” says Daniel Cohen, founding partner of Consumer Attorneys in New York City.

Shawn Plummer, CEO of The Annuity Expert in Atlanta, agrees.

“Preapproval signals a lender’s preliminary commitment to offer you a loan, giving you a budget framework,” he says.

Note that preapproval isn’t the same as “prequalification,” which yields a lesser commitment from a lender. Prequalification involves a soft credit inquiry that can produce interest rate estimates you might qualify for, though your actual rate could end up being higher.

Car loan preapproval requires a hard credit inquiry (more on this later), and getting preapproved is more useful to car shoppers and car sellers alike than merely being prequalified.

What are the advantages of getting car loan preapproval?

Preapproval can simplify the buying process by establishing a clear budget upfront. By getting preapproved, the lender should indicate how much they are willing to lend, how much you can afford, and what your monthly payment will likely be based on what you borrow and other criteria.

“Preapproval may also offer more favorable loan terms compared to getting on-the-spot financing from a dealership,” notes Dennis Shirshikov, a finance and economics professor at the City University of New York. “They can provide you with increased bargaining power and a smoother purchasing experience because you’ll know exactly what you can borrow and afford, allowing you to walk more confidently into a dealership or enter into a negotiation with a private seller.”

Being preapproved could result in spending less time at the dealership or car lot, rejecting pressure to accept their unfavorable financing offers, and negotiating from a position of strength.

“It effectively turns you into a cash buyer in the eyes of the dealer or seller,” says Plummer.

Who are good candidates for getting preapproved for a car loan?

According to Ryan Vann, vice president of consumer lending for PenAir Credit Union, buyers who have not had a car loan previously or who are concerned with their ability to qualify should try to get preapproved before shopping for a car.

“Individuals with stable income, good credit, and a clear understanding of their vehicle needs and budget are prime candidates for loan preapproval,” continues Shirshikov.

You’ll also help your case if you’ve salted away a sufficient down payment (many lenders prefer that you put down 20% if you can afford it) and can demonstrate financial stability via solid earnings, steady employment, and savings in the bank.

What are the steps involved with getting car loan preapproval?

The preapproval process typically involves the lender checking your credit score and requesting financial as well as personal information like your Social Security number, date of birth, address, and contact information.

“Usually, it entails providing basic information, without needing to furnish supporting documentation, about your income and financial assets,” Cohen explains.

“Additionally, preapproval requires running a hard credit inquiry to determine whether or not you are a creditworthy borrower and narrow the zone of affordability for the cars you might be interested in test driving and purchasing. This hard credit inquiry is a formal peek at your credit history that allows the lender to review your credit report and credit score. It signals to the lender whether there is a likelihood of you ultimately earning loan approval and what the expected range of your loan funds might be.”

Keep in mind that a hard credit inquiry counts as a strike against your credit; hard inquiries remain on your credit reports for two years. A single hard credit inquiry can decrease your credit score by up to five points; your score should rebound within a few months or up to a year. 

You can likely count on a preapproved offer remaining valid for 30 to 60 days.

A preapproval is not a guarantee

Getting preapproved does not mean you are a lock for obtaining a car loan. You may be denied financing after getting preapproved.

“All preapprovals have conditions, such as a maximum loan-to-value ratio allowed, the type of collateral to be used, and other factors. There can also be contingencies like verification of income or employment. If these are not met, your loan may not be finalized,” cautions Vann.

According to Cohen, a preapproval may not result in an actual loan if one of four things happens:

1. You provided inaccurate information during the application process.
2. A subsequent comprehensive credit and financial assessment reveals information that signals increased risk to the loan underwriter that wasn’t recognized initially or that wasn’t accurately reported initially.
3. Your behavior or circumstances between loan preapproval and the formalized loan damages your credit. “To the lender, this might look like accruing an unreasonable amount of debt across that period, losing your job, or even authorizing an excessive amount of credit inquiries while shopping for a car or any other high-priced asset,” says Cohen.
4. Your credit history/credit reports have inaccuracies that raise red flags. “Given that up to a third of all consumers find errors in their credit reports, this can impact a sizable percentage of the population. That’s why it’s wise to carefully review your free credit reports and address any errors you notice,” Cohen advises.

The bottom line

Navigating the auto loan landscape requires careful consideration and due diligence. That’s why getting preapproved for financing is recommended: You’ll know ahead of purchasing a car what you can afford and what you qualify for.

Just remember that preapproval will result in a hard credit inquiry, so don’t proceed with this step until you know you are ready to start car shopping.