AUTO
Getting Pre-qualified vs. Pre-approved for Auto Loans
EXPECTED READ TIME: 10 minutes
You’ve spent countless hours reading reviews and comparing prices. Now, you’re ready to set the wheels in motion on buying that truck of your dreams. There’s just one more thing you need to do before applying for an auto loan: get pre-qualified.
Or is it pre-approved? Or both? Or neither?
If you’re not quite sure how to distinguish between pre-qualifications and pre-approvals — much less when you need them or what to do with them — this guide is for you.
Read on to fast-track your understanding of these confounding car loan concepts.
What Does Pre-qualified for a Car Loan Mean?
Getting pre-qualified for an auto loan means a lender has reviewed basic financial information to estimate the amount of money you may qualify to borrow and at what interest rate (usually a range). You can use a pre-qualification to understand how likely you are to be approved for a loan and get an idea of how much you can comfortably spend to buy a new or used car.
What Does Pre-approved for a Car Loan Mean?
What’s the Difference Between Pre-qualified vs. Pre-approved for a Car Loan?
For example, you can usually get pre-qualified for a loan by telling a potential lender what your annual income is and roughly how much debt you have. The lender will take your word for both and may (or may not) take a quick look at your credit score. Based on this information, the lender will let you know if you’ll likely be approved for a loan.
With a pre-qualification, neither you nor the lender invest much time or effort in the process. So, there’s no real commitment from either side.
On the other hand, if a financial institution pre-approves you for a loan, they’re more or less promising to lend you money. Rest assured they’ve reviewed your full credit report and verified your annual income and outstanding debt.
Pre-approval isn’t a set-in-stone guarantee that your loan application will be approved. However, it’s a pretty solid commitment that’s as close as you can get to a binding agreement until you sign the actual contract and receive the loan funds.
Pros and Cons of Getting Pre-qualified vs. Pre-approved for an Auto Loan
Credit Impact
On the other hand, when you apply for pre-approval, the lender will pull your full credit report to review your credit history and determine if they’re comfortable loaning you money. This is known as a hard inquiry, or hard pull, and it will temporarily lower your credit score by approximately five points or less, which can make it harder to qualify for other loans or credit cards until your score rebounds.
Keep in mind if you plan to get pre-approvals from more than one lender, you should apply for them all within a two-week window. Multiple hard inquiries are usually treated as a single pull on your credit if they’re performed within a 14-day timeframe, which means your credit score will only get dinged once.
Certainty
If you pre-qualify for an auto loan, you’ll get an idea of how much money you might be approved to borrow within a given interest rate range. It isn’t a guarantee that you’ll actually be approved for a loan. So, if you are eventually approved, the actual loan amount, interest rate, and term length may differ from what your pre-qualification indicated.
Barring any unforeseen issues with your application, credit, or the vehicle itself, a pre-approved auto loan confirms you’ll receive a specific amount of money that you’ll repay at a set interest rate for an established amount of time. It is, for all intents and purposes, a guarantee.
Negotiating Power
While an auto loan pre-approval is beneficial when planning your car-buying budget, it doesn’t provide much negotiating leverage because you haven’t actually been approved for a loan. Ultimately, you may have to play the back-and-forth game with the seller and listen to their pitch about dealer financing before you get their best price.
Heading to a dealership with a pre-approval in hand — or, in some cases, an actual check from a lender — helps you negotiate more effectively. The seller will view you as a cash buyer, so they’ll be more inclined to offer you their best price rather than trying to “sell” you on a monthly payment.
Overall Buying Experience
When you pre-qualify for an auto loan, you still don’t know if you’ll be approved for the amount you need to buy the car you want. This can shift your attention from test drives and learning all you can about features and benefits to concerns about financing, making what’s often already an anxiety-inducing endeavor even more stressful.
Meanwhile, getting pre-approved for a car loan allows you to focus on finding the vehicle that’s right for you instead of worrying about money and monthly payments. With far fewer numbers swirling around your head, you can concentrate on how the car feels when you’re behind the wheel, which should enhance your overall buying experience.
| Pre-qualification Pros & Cons | Pre-approval Pros & Cons |
|---|---|
| No impact on credit score | Temporarily lowers credit score |
| Not a guarantee you’ll be approved for a loan | Usually guarantees loan approval |
| Allows you to estimate what you can afford | Helps you know exactly what you can afford |
| Interest rate may be higher than estimated | Interest rate is established for the loan |
| Limited leverage for negotiating | Considerable negotiating power |
| No cost to pre-qualify | Usually no cost for pre-approval |
How to Get Pre-approved for a Car Loan
One of the best things about getting pre-approved for a car loan is how easy it is to do. Follow these four steps to improve your chances of receiving the thumbs up from a lender:
- Check your credit. The higher your credit score, the better your chances of being pre-approved for an auto loan. Since you’re entitled to a free copy of your credit report each year from all three national credit bureaus, request yours and verify or correct the information before applying for pre-approval. This will boost your chances of qualifying — and help you get the best interest rate.
- Gather important documents. As simple as it is to request pre-approval for a car loan, you will have to do a little legwork. Lenders typically ask for information to confirm your identity, income, employment status, assets, and debt, so you’ll want to have the following documents handy when applying:
- Driver’s license, passport, or state or military ID
- Social Security number
- Pay stubs or W-2s
- Bank and credit card statements from several months
- Copies of other loan agreement
- Research rates and lenders. Before applying for pre-approval, spend some time online researching auto loan offerings from several credit unions, banks, and online lenders. Look for lenders that offer the best rates, charge the fewest fees, and make the application process quick and easy (meaning, online). Then, use an auto loan calculator to estimate your monthly payments with different rates and terms.
- Get multiple offers. Since it typically doesn’t cost anything to get pre-approved, it’s a good idea to seek pre-approvals from two to three lenders. This allows you to compare rates and terms and find the loan (and lender) that works best for you.
How to Buy a Car With a Pre-approved Loan
For the most part, buying a car with a pre-approved loan is the same as buying a vehicle the “traditional” way. You’ll notice the most difference when talking price and finalizing the deal.
Since you already have financing arranged, you don’t have to accept the dealer’s financing offer — or even listen to it. You can skip the back and forth by asking for the out-the-door price. If you’re comfortable with the number, you can move straight to the paperwork.
That said, if you’re not in a rush, you may want to at least hear about the dealer’s financing offer. After you've negotiated a final price, compare their loan option to what you secured on your own. Then, select the option with the lowest rate and best terms.
Can You Be Denied a Car Loan After Pre-approval?
- Application errors. If, for some reason, you made a mistake filling out your loan application — say, you wrote down the wrong Social Security number, forgot to mention all outstanding debt, or didn’t sign some paperwork — a lender can choose to deny your loan. So, remember to cross your t’s and dot your i’s when filling out your application.
- Changes in financial situation. By and large, you should avoid opening a new credit card or taking out another loan if you’re counting on the auto loan pre-approval to be valid when you’re looking to close the deal on a new ride. A lower credit score or more debt than when you applied for pre-approval could potentially nullify the offer.
- Offer expires. Most auto loan pre-approvals are good for 30 to 60 days, so it’s better to wait until you’re (almost) ready to buy before applying. The less time that lapses between your application date and when you make an offer on a car, the better the chances of the loan being finalized.
- Low car value. If you’re buying a used car, a lender may renege on their pre-approval based on the condition, mileage, intended use, and overall value of the vehicle. You can research what cars and trucks in your area are worth with Kelley Blue Book or Edmunds.
Why You Should Get a Pre-approved Auto Loan at a Credit Union
Although you can get pre-approved for an auto loan from traditional banks and online lenders, applying through a credit union provides some distinct benefits. They typically include:
- Lower rates
- Reduced (or no) fees
- Flexible terms
- Better service
Wondering how credit unions are able to offer these advantages? In a word, membership.
Credit unions are owned by their members, so profits are reinvested in the credit union rather than being paid out to shareholders. Members, in turn, often enjoy lower interest rates, higher dividends, fewer fees, and more charitable investment in their communities.
The Takeaway
Whether you’ve just begun your car search or you’re ready to start wheelin’ and dealin’, an auto loan pre-qualification and pre-approval should be incorporated into your strategy.
Investing a small amount of time at these early stages of your car-buying journey can yield substantial savings of energy, effort, heartache — and, perhaps most importantly, money — throughout the process and over the life of your loan.
