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Buying a car can be exciting, but before you go shopping you should take some steps to get your finances in order to find the right loan and vehicle for your budget.
A new vehicle is a big purchase. If you plan to buy a new or used car with a loan, applying for prequalification helps you set your budget and get an idea of the long-term cost of the purchase.
- What is prequalification?
- Benefits of prequalifying for an auto loan
- Is there a difference between prequalification and preapproval?
- What information you’ll need to apply for prequalification
- What to watch out for with loan prequalification
What is prequalification?
Prequalification can help you determine whether you might be approved for a loan, and it can give you an estimation of rates you might receive when shopping for a car. Getting prequalified doesn’t mean you’ll automatically be approved for the loan. You’ll still need to fill out a formal loan application for the lender to review.
If you want or need a new vehicle and can’t afford to buy it with cash, you may need to finance it with a loan. Prequalification can give you a better idea of what your approval odds — and your estimated loan terms — would be once you do submit the final loan application.
Getting prequalified can also mean working with a lender. If you work with a loan officer, this can help you begin a relationship — something that can make the entire purchase process smoother once you find your new ride.
But you don’t need to tie yourself down to one lender for prequalification. It’s usually smart to compare interest rates and see what loan terms different lenders are willing to offer you to help you get the best deal.
What’s the average new car price?
According to the National Automobile Dealers Association, the average price of a new car in the U.S. is about $37,000. If you don’t have that much cash in the bank, you’ll likely need a loan to purchase a new vehicle. Factor in the value of a trade-in if you want to get rid of your current car.
Benefits of prequalifying for an auto loan
There are many pros to applying for prequalification for an auto loan. Here are some of them.
- Knowing your credit is good enough for a car loan — It would be tough to go pick a new car only to get turned down for an auto loan because of your credit scores or credit reports. Getting prequalified gives you an indication of whether you can get the green light for the loan, though you’ll still need to submit a loan application to find out if you’re approved.
- Having an idea of your budget before you go shopping — Just like getting turned down for a loan, picking your dream car only to find out you can’t afford it can be a major disappointment. When you have an idea of what you can borrow, you can focus on cars you can afford.
- Skipping dealership financing — Once you choose a car and negotiate a price, you don’t need loan approval from the dealership, which may cost more than going directly to a lender yourself. And if you decide to apply with the lender and are approved, the dealer may even contact your lender on your behalf to make final arrangements, leaving one less thing for you to do.
Is there a difference between prequalification and preapproval?
Both prequalification and preapproval can give you an idea of estimated loan terms and if you might be approved for a loan from the lender. In practice, prequalification typically means the lender will use a soft credit inquiry, while preapproval often indicates a hard inquiry. You should check how the lender uses the term to find out what it means for you. Learn more about the difference between preapproved vs. prequalified.
What information you’ll need to apply for prequalification
Getting prequalified for a loan is similar to getting approved for a loan. Lenders typically require your personal information and a soft credit inquiry.
For personal information, lenders will usually want to verify the following:
- Employment information
- Current debt obligations
It’ll probably also be handy to have your Social Security number, driver’s license, proof of income and housing payments.
To check your credit, the lender may use a soft inquiry or a hard inquiry to pull your credit reports and scores. A soft inquiry doesn’t affect your credit scores, while a hard inquiry may have a small impact on your credit scores. So if you’re shopping around for the best rate, check if you’re dealing with a soft or hard inquiry first.
And remember, multiple inquiries made within a 14- to 45-day window often count as only one inquiry, depending on the credit-scoring model, so you can try to get a better rate while minimizing the effect on your credit scores.
What to watch out for with loan prequalification
Keep in mind that a prequalification isn’t a guarantee that you’ll be approved for a loan. You still have to get final approval from the lender.
Keep your eyes on the loan terms before you sign your loan agreement, including these important figures.
- Loan amount — How much you can borrow
- Interest rate and annual percentage rate — How much you pay to finance the loan (not including the cost of the vehicle itself)
- Loan term — How many months you’ll have to pay back the loan
- Monthly payment — The minimum payment each month over the life of the loan
If you can afford to buy a car outright with cash, not only will you save money on interest and loan fees, but you can also skip the entire prequalification process. But if you do want to buy a car with a loan, applying for prequalification can make the buying process smoother, and it can help you avoid unpleasant surprises along the way.
If you’re ready to start the prequalification process, first you’ll need to decide the best type of auto lender for you. Then, you’ll want to make sure to comparison shop across different lenders to find the best rate you can. Make sure you come prepared with all the information you’ll need, along with the type of car you’re looking at and the budget you’re aiming for.