Should I Get Preapproved for a Car Loan?

Getting preapproved for an auto loan before you walk into a dealership helps put you in the driver's seat of a big financial decision. During the car-buying process, you'll know your approved dollar limit and interest rate, compare offers and be in a better negotiating position for price or even a better loan, whether for a used or new car.  

The Consumer Financial Protection Bureau recommends comparing loans offered by various lenders before you shop for a vehicle.

Takeaways: 

• Auto loan preapproval can help you set a realistic budget, choose financing options and provide more control over your car shopping experience.
• A loan preapproval will require an application for credit, which appears on your credit report as a hard credit inquiry.
• Your loan approval isn't final until you choose a car. 

The institution considers these factors to provide you with an estimate of the car loan amount they can offer. This quote allows you to shop around and compare different offers, including what a dealer may provide, and reassures the car dealer you're a serious buyer.  

Some financial institutions work with select dealerships. BECU, for example, works with dealerships in Washington, Oregon and Idaho, offering special auto tools to help you review options, find deals and shop online. Dealer partners can help you apply, shop and buy in one visit without a separate preapproval process.

Car Loan Preapproval Pros and Cons

Car Loan Preapproval Pros:

• Sets realistic expectations: A lender's limit can help you understand how much you can afford before you start test-driving vehicles and get your heart set on an expensive car.
• Potentially saves money: Some dealerships mark up loan pricing to boost profits. Having the option to select a different lender with a lower interest rate can save you money. 
• Increases negotiating power: If you have preapprovals, you can ask other lenders or dealerships for a loan with better terms, such as a lower interest rate. You can decline any dealer financing offer and proceed with the financing you're already preapproved for, increasing the efficiency of your experience.
• Offers flexibility: You can buy from any car dealer with a preapproval letter. You'll need to meet requirements regarding your down payment, minimum credit score or car type. Once approved, you'll likely have a wide range of options.

Car Loan Preapproval Cons:

• Could miss out on a better offer: Sometimes, a dealership can beat your preapproved offer — just watch out for any extra costs or fees. But don't rule out dealership financing altogether.
• Credit score impact: Whenever you apply for credit for formal approval, your credit score could go down temporarily due to the hard credit inquiry. 
• Limits options: Some bank or credit union lenders won't lend you money to buy specific vehicles or buy from a private seller. You may have to pay cash, use dealer financing or shop around for a lender who will let you buy the vehicle you want. 
• Time-consuming: Getting multiple preapproved car loans before you start car shopping could require a time commitment. You'll need to collect financial information and documentation and endure the hassle of applying, particularly if you want to comparison shop.  

2. Ask Questions and Get Estimates

Use online calculators or talk to your financial institution about the vehicle you're interested in and how much you want to borrow.

"Based on credit information, vehicle type and desired loan amount, our lending specialists can go over the member's questions and estimate possible rates and terms," said Lisa Dela Cruz-Kahoano, BECU consumer loans department manager. 

"Without an application, we would only be providing estimates," Dela Cruz-Kahoano said. "This can be done without having their credit pulled." 

3. Gather Necessary Information

Once you're ready to submit an application, you'll provide information including: 

• Your name 
• Your Social Security number or ITIN 
• Your date of birth 
• Your current and previous address and how long you lived there
• Occupation 
• Current and previous employer(s)
• Length of employment 
• Other sources of income 
• Total gross monthly income 
• Debts you owe

4. Get an Offer From Your Bank or Credit Union

When you apply for an auto loan, a lender makes a hard credit inquiry. This process typically decreases your credit score temporarily. The wait time can vary based on your information and the lender from which you seek preapproval. 

You can shop for car preapproval with multiple lenders. Getting various quotes only impacts your credit score as one inquiry if you shop within a 14-day window. As with mortgage shopping, credit inquiries related to an auto loan only count as one hard credit pull.

5. Review and Compare Your Preapproval

If credit is approved, you'll get a copy of your preapproval letter.

"This preapproval letter allows our members to shop for a vehicle with the knowledge that they have been preapproved for a loan," Cruz-Kahoano said. 

When you receive preapproval offers in writing, you'll see the maximum amount you can borrow from the lender. However, this amount will have to cover taxes and fees in addition to the purchase price, so your out-the-door total must come in under the maximum amount. 

Compare this amount to other offers, reviewing the maximum amount, your potential APR and monthly payments.  Then, go shopping for your next vehicle purchase. Auto loan preapprovals typically last 30 to 60 days or less but vary by institution.

6. Final Approval 

While preapproval is a useful consumer tool, it's typically only conditional. Once you've decided on a new or used vehicle, you'll send the car's purchase order to your lender to get final approval for an auto loan. The lender will give you full, final information about the loan including:

• Total sale price
• Amount financed
• Annual percentage rate
• Finance charge or fee
• Total of payments

Where to Get Preapproved For a Car Loan

Compare different financial institutions to find an affordable financing option, including banks, credit unions and online lenders.  Lenders will have different requirements to meet for a car loan application, including: 

• Vehicle types financed: Some lenders will only lend for specific vehicle types, such as autos and trucks, not RVs or motorcycles.
• A minimum credit score: Lenders may only work with borrowers with a credit score above a minimum.
• The vehicle's maximum age and mileage: Lenders may not give a loan for an older car or a vehicle with too many miles.
• Minimum down payment amount: A lender may require a 10% to 20% down payment toward your vehicle.
• Membership: Credit unions will require credit union membership to take out a credit union loan. However, you may be able to apply for membership when you apply for the loan. 

So, first, ensure your auto and credit history are a good fit for the lender before applying. If you need to wait and improve your credit score, do so — or consider a co-signer. 

Preapproval for New vs. Used Cars 

New and used cars may differ in preapproval in several ways. Lenders may have different requirements for vehicles including regarding age, mileage and model year and new car loans typically have a lower interest rate than used car loans. However, some lenders offer new-car-loan pricing on cars up two years old — not just this year's model.   

What To Do if a Lender Declines Your Application

If a lender declines your application, they'll tell you why — for example, a poor credit score, insufficient credit history or too much debt. 

If you're at risk for a high interest rate due to a poor credit score, consider finding a co-signer with an excellent credit score. When reviewing your credit application, the lender will incorporate the better score into your interest rate considerations.  

However, if you don't repay your auto loan, the cosigner is legally obligated to do so. Cautious conversations should come before entering into an auto loan together, particularly with family, friends or a romantic partner.  

You can also wait and improve your credit score by addressing or decreasing any debts you owe and ensuring you make timely payments. You can also improve your debt-to-income ratio to reassure lenders you'll repay the auto loan, or you can try to get a higher paying job to improve the ratio.  

Auto Loan Preapproval vs. Prequalification

With a car loan preapproval, a lender states they're willing to let you borrow a specific amount of money. However, some lenders use a term called "prequalification," which sounds similar but isn't.  

Prequalification doesn't require an application or any hard inquiries on your credit. These reviews of your credit can be based on information from up to 60 days earlier, and you can prequalify as often as you wish. However, it's less certain than a loan.

Preapproval involves completing an application with a lender, which performs a thorough check of your credit history, debt and income. 

FAQs About Auto Loan Preapproval

Are There Certain Types of Vehicles That Lenders Won't Finance?

You may have a harder time finding lenders who will finance classic vehicles, cars with high mileage or low value, commercial trucks, and other less common vehicles. You likely can't buy a car priced higher than the maximum loan limit the lender offers. There are several different types of cars most lenders won't finance (like salvage vehicles), so review a lender's requirements before applying. 

Why Is It Important To Get Preapproved for a Loan?

A loan preapproval allows you to shop from any dealership selling a car that meets your needs and your lender's requirements. It also allows you to negotiate with the dealership. They might offer you a better deal than your preapproved auto loan. 

Does Auto Loan Preapproval Hurt Your Credit?

It depends. If the preapproval pulls your credit as a hard inquiry, your credit score will decrease slightly for about 12 months. If you accept a loan offer, it could drop further, and then recover as long as you make consistent payments. If you get a prequalification that only pulls your credit as a soft inquiry, your credit score shouldn't be impacted at all — but any loan offer won't be as solid. 

Final Considerations

Auto loan preapproval allows you to shop for rates and amounts just like you'd shop for a car. You can compare amounts, terms, and APRs to find the loan allowing you to pay less for your vehicle purchase. Getting a loan preapproval allows you to skip the dealership financing process or ask the dealer to compete with the terms you have on hand. 

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