Quick Facts About Car Loan Preapproval
- Shop multiple financial institutions to find the best auto loan interest rates.
- Clean up negative marks on your credit report to obtain better interest rates for your car loan.
- Keep preapproval details out of sight until the dealer makes their best offer.
If you’re shopping for a car and looking to finance soon, you’ll want an auto loan preapproval when you go to the dealer. A preapproved auto loan lets the dealership know you’re a serious shopper, and having that financing offer in advance helps ensure you can qualify for a loan and that you’re shopping in the proper price range. Moreover, it will help you secure the best possible interest rates for a lower monthly payment. Learn how and why to get preapproved for your next car loan.
- What Is an Auto Loan?
- What Is an Auto Loan Preapproval?
- How to Get Preapproved for an Auto Loan
- Preapproval Considerations
- How Do I Buy a Car With a Preapproved Loan?
What Is an Auto Loan?
An auto loan is a finance contract in which the bank or lender covers the cost of a vehicle, and the borrower agrees to repay the balance over a defined timeframe. Unless you plan to pay for your next car with cash, you will likely need an auto loan.
Car loans are installment credit agreements, which typically carry lower interest rates than revolving credit lines like credit cards. The agreement is that you will make monthly payments until you pay back the amount you borrowed, plus interest. If you fail to keep your part of the agreement, the lender can take the vehicle from you. The loan’s interest rate contributes to the total cost of the finance agreement and is arguably the most crucial factor to consider when choosing a lender. The interest rate you’re offered can differ from the advertised APR (annual percentage rate) based on the loan term, the amount financed, and your credit history.
RELATED: Car Finance 101: Everything You Need to Know
How to Get an Auto Loan
While you can get an auto loan through a car dealer’s preferred lenders, we recommend shopping around for the best rates before settling for that route. Most banks and credit unions offer auto loans to qualified applicants. Each lender has different requirements for approval, but the first step is to contact a trusted financial institution and submit an application. You can either do this in person or online in most instances.
When applying, you’ll select from different types of auto loans: dealer purchase, refinance, lease buyout, or private party. For new and used cars from a dealer, always apply as a dealer purchase loan.
PRO TIP: Look at all the fine print when you’re checking interest rates because not every lender offers loans to buy cars from private sellers or independent dealers. In other words, some banks and credit unions only finance vehicles from franchise dealers or approved independent dealership chains.
Related: Car Financing Glossary: Finance Terminology Explained
What Is an Auto Loan Preapproval?
After you complete the auto loan application, the lender will consider your personal information and decide whether to approve or deny the loan. This will prompt a hard credit inquiry as they evaluate your creditworthiness. If you go through this process with the bank approving an estimated loan amount at an estimated interest rate before starting the car shopping process, this is considered a “preapproval.”
Do Car Preapprovals Hurt Your Credit Score?
Submitting a loan application for preapproval requires a “hard credit inquiry.” This type of credit check can knock a few points off your credit score. However, the impact of a hard inquiry is not significant, and it’s only a temporary hit. It’s relatively common for borrowers to submit loan applications to more than one potential lender. Because credit bureaus expect you to shop around for financing, multiple hard inquiries within a month typically count as one inquiry.
How to Get Preapproved for an Auto Loan
The best way to ensure you get preapproved for an auto loan is to have a good credit score and a favorable credit history. If possible, check your credit three months before you submit a loan application. While shopping for a car is sometimes urgent, knowing your credit score early in the process can give you time to take steps to improve it. Cleaning up negative marks or correcting inaccuracies in your credit report can lead to better interest rates. The lower your auto loan interest rates, the lower your monthly car payments, and the less you’ll pay in the long run.
See our guide on improving your credit score before applying for a new car loan.
Preapproval Considerations
Shop around. If you’re looking for the best interest rates, submit your information to multiple lenders to find the most attractive loan terms. Most credit monitoring networks are sophisticated enough to classify multiple inquiries within a given period as a single hard hit, so it won’t hurt your score if you shop around.
Don’t immediately share the preapproval. When you get to the finance desk at the dealer, don’t share your preapproval letter details right away. Let them crunch their numbers and present an offer first. If the terms of your preapproval are better than what the dealer offers, use it to negotiate a more favorable agreement.
Prequalified vs. Preapproved. These terms are sometimes incorrectly used interchangeably. Preapproval requires a formal application and a credit check. An early step in the process may be prequalification, when a lender does a preliminary review of your ability to repay a loan. From there, it determines if you’re “qualified” to apply for the loan.
How Do I Buy a Car With a Preapproved Loan?
When you’re preapproved for an auto loan, the lender will provide a letter declaring the total amount for which you’ve been authorized to spend. Once you find a car within that price range, you can work with the dealer to arrange payment from your bank or credit union.
Read Related Articles:
- What Does It Mean to Finance a Car?
- Can You Buy a Car With a Credit Card?
- 5 Tips for Financing a Car With Bad Credit
Editor’s Note: This article has been updated since its initial publication.
