The benefits of getting preapproved for a car loan

Woman looking at cars in a dealershipImage: Woman looking at cars in a dealership

In a Nutshell

Getting preapproved for a car loan helps you get an understanding about much you can borrow for a car. A car loan preapproval can offer you more flexibility to choose which car dealer you want to work with and can give you greater negotiating power. You’ll typically need to provide lenders a few pieces of personal, financial and employment information in order to be considered for an auto loan preapproval. Depending on the lender, you could receive a decision within minutes.
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Getting preapproved for an auto loan before you walk into a dealership helps put you in the driver’s seat during the car-buying process.

A preapproval is conditional approval given to you from a lender with estimated terms — such as the amount of money you can borrow, the interest rate and loan term — to finance the purchase of a car. This loan quote makes it easier to estimate the total cost of the loan and to create a budget before you start shopping.

A preapproval is a great way to let dealers know you’re a buyer who’s done your homework. Also, if you get preapproved, you won’t necessarily have to rely on dealer financing. This could give you greater negotiating power at the dealership, which can make the car-buying process less stressful.

Getting preapproved for an auto loan can be an easy process — if you’re prepared with the application documents you need and have healthy credit. Let’s explore what you need to do to help get preapproved, how it can benefit you and what you might want to consider if you don’t get preapproved.



The benefits of getting preapproved for a car loan

If you have your heart set on a shiny new car — or even a used car — you may be tempted to run out to the dealership and start negotiating. But if you aren’t preapproved for a loan before you start shopping, knowing how much you can borrow beforehand can be difficult to calculate, and you may not know what cars you can afford to buy. Here’s how taking the time to get preapproved can help set you up for success.

Get an idea of how much you can borrow

Getting preapproved for an auto loan can help you set realistic expectations about what you can afford to spend. When you receive an auto loan preapproval, the lender gives you a quote for the amount you can borrow and may include the car, title, taxes and additional fees.

You’ll also get an idea of what your interest rate and loan terms will be, so you can calculate your monthly car payment and how much car you can afford accordingly. Remember, you don’t have to apply for the maximum amount you’re preapproved for. And in many cases — after you factor in the rest of your expenses — it may be a good idea to borrow less if possible.

Ultimately, it’s up to you to decide how much you can comfortably afford to borrow.

You can focus on the car

If you haven’t taken the time to run the numbers before you go to the dealership, it’s easy to get distracted wondering what you’ll be able to afford and how much your monthly payments will be. But if you already have an idea of how much you can spend beforehand, you can focus on cars that fall within that price range and your budget. This can help you feel confident that your loan payments won’t stretch your budget too thin.

You’ll have greater negotiating power

If you go to the dealership without an auto loan preapproval and find the car of your dreams, it could be tempting to take whatever financing is available to avoid losing out on the car. But if you have a preapproved loan offer, you may be less likely to feel pressured to get dealership financing that may cost you more than you’d like. Also, if you have preapprovals from multiple lenders, you can choose the offer that’s best for you, which gives you room to negotiate with the car dealership. If the dealership really wants your business, it may be willing to beat the interest rate your lender is offering.

How to get preapproved for a car loan

Now that you have an idea of why it’s important to get preapproved, here are some steps you can take that can help.

Check your credit

Lenders will usually review your credit history before issuing a preapproval because it helps predict how likely you are to repay a loan on time. To help ensure there are no surprises during your credit check, review your credit reports before going to the lender to see if all the information is accurate. If you find incorrect information on a credit report, you can dispute the information.

Gather the necessary information

Getting preapproved can require quite a bit of information. Lenders often ask for information about your identity, income, employment information, credit history and other debt payments when reviewing your application for preapproval.

After you review your credit reports, gather the information your lender may request:

  • Social Security number
  • Driver’s license, state ID or military ID
  • Employment status
  • Income

A lender may pull your credit reports as part of the preapproval process, which could generate a hard inquiry on your credit file. Before applying for preapproval, you can check whether the lender is running a hard or soft inquiry.

Hard credit checks from multiple lenders — from around 14 days to up to 45 days — will usually count as just one inquiry, depending on the credit scoring model used. To minimize the impact to your credit scores as you shop for rates, it’s a good idea to get all of your preapprovals within that 14- to 45-day window.

When your application is complete, you’ll typically receive a decision, sometimes in a matter of minutes. In some cases, a lender may need to contact you for more information before it can make a decision.

Get multiple offers

Accepting the first price a dealership offers you on a car may not be recommended, nor is it wise to take the first loan offer you get. Loan features that affect how much you’ll pay over the life of the loan (such as interest rates and loan terms) vary, so it’s worth getting preapprovals from at least a few lenders.

Check out what car loans from banks, credit unions and online lenders have to offer and compare each offer carefully. If you skip this part of the process, you won’t know if you could have gotten a better deal somewhere else, and you may end up paying more than you need to. By having multiple offers from different lenders, you can compare them to ensure you’re getting a rate with terms that fit your budget.

Go shopping

Once you’ve received preapproval for an auto loan from several lenders, you can take the best offer to the dealer and start shopping. But don’t wait too long. Preapprovals are typically valid for 30 to 60 days.

When you find a car you want to buy, you can submit a formal loan application with the dealer that may include a lot of the information you used for the preapproval, including specifics about the car such as the year, make, model, mileage and VIN.

Are there certain types of vehicles that lenders won’t finance?

Some lenders restrict the vehicles they will finance. Restrictions are often based on the type of vehicle, how it will be used, the make or number of miles the vehicle has on it.

What to do if you can’t get preapproved

It can be tough to hear that you don’t qualify for preapproval when you’re in the market for a vehicle. “Preapproval declines happen for a number of reasons, including a lack of consistent and/or sufficient income or some adverse activity in [a consumer’s] background,” says Mark Lucke, chief sales officer, Sunrise Banks.

Fortunately, there are some things you can do to improve your chances of getting preapproved.

Build your credit

If you have a history of making late payments, maxing out lines of credit and carrying a large debt load, your credit may not be as strong as you’d like. But that doesn’t mean it can’t be improved.

Habits like consistently paying your bills on time, keeping your credit utilization low and minimizing your debt-to-income ratio can help you establish a solid credit history and improve your chances of getting preapproved.

“Individuals can always take their chances at a dealership, but if it’s possible to improve their credit situation and they’re serious about it, we advise [them] to work toward improvement and try for preapproval in four to six months,” Lucke says.

What is debt-to-income ratio?

This ratio compares your current monthly debt payments to your monthly income. Lenders use it to help measure your ability to manage payments. The lower the ratio, the better.

Earn more, save more

Even if you have good credit, a lender may not approve you for a loan it doesn’t think you can afford to repay. Not sure why you were denied? Ask. Under the Equal Credit Opportunity Act, your lender may send you an adverse action notice if you were denied for preapproval.

If your application for preapproval was denied because of your ability to pay, here are two options. You can save more for a down payment to reduce the amount you need to borrow, or you can boost your income. It may not happen overnight, but if you can get a higher-paying job or side gig, it could improve your ability to repay your loan.

Consider getting a co-signer

If you can’t wait to get a car, consider asking someone you know and trust to co-sign the loan with you. A co-signer is someone who agrees to pay back the loan if you can’t. But remember, a co-signer is putting their financial health on the line. If you don’t make your payments on time or you default on the loan, it won’t only impact your credit, it could negatively impact theirs as well.


Next steps

Getting preapproved for a car loan can help you save money by allowing you to compare loan offers and by improving your negotiating power during the car-buying process. Plus, it gives you an opportunity to review your budget before you start car shopping, so you can keep your finances on track.

If you aren’t able to get preapproved, taking steps to improve your credit could make it possible down the road.


About the author: Jennifer Brozic is a freelance financial services writer with a bachelor’s degree in journalism from the University of Maryland and a master’s degree in communication management from Towson University. She’s committed… Read more.