What To Know About Preapproved Auto Loans

Preapproved auto loans are loans that have already been approved by the potential lender. They can help you clarify your budget so you can shop around for the best interest rate and loan term.

A preapproved loan also puts you in the driver’s seat when negotiating a car’s out-the-door price. And while you aren’t guaranteed approval, getting preapproved is a good way to stay on budget and find a good deal.

What is a preapproved auto loan?

Preapproved auto loans are loan products that have already been conditionally approved by the potential lender. This means that the lender has already decided to give you the loan, assuming there are no drastic changes to your financial situation before the loan closes.

A preapproval offer will list your interest rate, auto loan amount and loan terms so you can walk into the dealership as a cash buyer with a firm understanding of how much you can spend. Preapproval is helpful if you want to negotiate at the dealership.

If you want to be sure you’re getting the best deal, see what the dealership offers in terms of financing. Either they can offer you a better rate or you go with the loan you already have.

Preapproval vs. prequalification

Prequalification is a process where you provide a lender with basic financial information and it gives you an estimated loan amount, term and rate. It’s a preliminary step that uses a soft credit check to give you a better sense of your borrowing power. And because it doesn’t impact your credit score, you can prequalify with multiple lenders and evaluate their offers before committing to one.

If you are ready to start shopping for a car, preapproval is better than prequalification. It gives you a firm idea of what you qualify for. Unless your finances change drastically, preapproval is essentially an offer that lets you fill in the blanks of the vehicle you want to finance.

This doesn’t mean it’s a guarantee, however. Your lender will still verify your credit score, income and other aspects of your finances, as well as the vehicle itself, before it fully approves you for an auto loan.

Prequalification isn’t as useful when you’re actively in the car-buying process. It’s an estimate based on general information — and it isn’t an offer. You will still need to submit an official application to the lender and undergo a hard credit check to qualify.

How to get preapproved for an auto loan

The preapproval process is similar between most lenders, and it is the most common option when you’re in the market for an auto loan. Start with researching lenders that work with your credit score, then be prepared to provide some basic information about yourself. 

1. Check your credit score. Your credit score plays a significant role in your approval odds and the loan options available to you, so check your credit score to see what you may qualify for. 
2. Research lenders. If your credit score is in good shape, explore lenders that work with borrowers in your credit bracket. 
3. Apply for preapproval. Submit a preapproval application to at least three lenders on your list. Compare loan quotes to find the best deal, and confirm the terms work for your budget. If they do, work with the lender to determine the next steps to complete financing and buy your vehicle.

Benefits of a preapproved auto loan

A preapproved auto loan has several benefits, including the ability to compare rates and budget for your monthly payment. It is a good choice for most borrowers because you aren’t locked in. If you qualify for a better deal, you can choose it instead.

You can compare auto loan rates

The preapproval process is streamlined, and most applications are usually processed within 30 minutes. As a result, you can shop around with several lenders and compare offers to find the best auto loan rate. Just make sure any full applications are done within two weeks so that they don’t count as multiple inquiries on your credit report.

Also, keep in mind that some banks and credit unions work with a specific dealer or set of dealerships. This can limit the selection of vehicles you can buy, and it also means you may not be able to buy from a private seller.

However, online lenders don’t typically have these restrictions, so it pays to shop around for rates before you start shopping for cars. If you find a much better deal on a used vehicle from a local dealership or private seller, having preapproval from a lender that doesn’t restrict your options is key.

You may get a better interest rate

Use preapproval to apply with multiple lenders at once to shop rates. If your credit is strong enough, some lenders may offer you a better interest rate than their competitors in an effort to earn your business.

Don’t discount in-house financing. If you have excellent credit, you may qualify for a 0 percent financing offer or other manufacturer incentives such as special lease deals or rebates that beat your pre-approval offer.

If you qualify for a good deal and it fits your budget, there is nothing stopping you from taking that option instead. Preapproval is about estimating your costs, but you’re never required to stick with the lender.

You’ll have a firm grasp on your monthly payments

Being preapproved before visiting the dealership means you already know the amount you qualify for, your interest rate and your loan term. That means you’ll have an estimate of your monthly payment before you start shopping and you’ll know exactly how much car you can afford.

Be sure the information you provided in your initial application is accurate. Remember, an auto loan preapproval is conditional, which means there are no guarantees. If there are discrepancies in the application and documentation, the terms of your loan, including the monthly payment, could change or you could be denied financing. 

You may also be denied if your credit rating drops significantly between when you are preapproved and when you submit your loan application. Taking out other loans, making major purchases or falling behind on other debts could cause a lender to decide not to approve your auto loan despite having issued a preapproval offer.

You’ll have the negotiation power of a cash buyer

A salesperson knows a lot of tricks, so remember not to show your hand too early when it comes to how much you are able to spend. Focus on finding the vehicle you want with the features you need rather than revealing your budget. That way you won’t be talked into a vehicle that costs more than you planned to spend.

You aren’t relying on the dealership for financing, so focus on negotiating the out-the-door (OTD) price rather than the monthly payment. The OTD price includes the price of the car plus taxes and fees — in other words, the total overall price.

When possible, pay taxes upfront to avoid paying interest on them. Ask for a list of fees included in your loan and negotiate removing unnecessary costs.

You should always negotiate the total cost of the vehicle before getting into the weeds with dealership financing. Dealerships like to focus on low monthly payments to make vehicles seem more affordable, but low monthly payments often mean longer terms and more interest paid. You will save on your loan by paying more per month over a shorter term.

Where to apply for a preapproved car loan

Most major banks, credit unions and online lenders offer preapproved auto loans. Start by contacting your current financial institutions to see if you are eligible for any relationship discounts. From there, you can branch out to other lenders.

Banks usually have higher eligibility requirements and higher rates, although you may qualify for a low rate with excellent credit. Credit unions often have some of the lowest rates as well as less rigorous requirements, but you may have to join (usually by opening a checking or savings account) to be eligible.

Online auto lenders usually have the most relaxed eligibility requirements, even offering bad credit auto loans. Just keep in mind that interest on these loans can be high.

Whichever type of lender fits your needs, investigate at least three different lenders. Doing so will give you a baseline for what you will qualify for and help you select a competitive offer.

You can typically apply online or at a branch, and some lenders offer the ability to apply over the phone. Have your documentation ready when you contact the lender to speed up the application process.

What information will you need for preapproval?

Before applying for auto loan preapproval, you’ll need to gather personal and financial documentation. Lenders use this information to determine if you’re a good fit for financing, and most will want to see the same types of information, including: 

• Proof of identity
• Address and phone number
• Proof of income and employment
• Proof of address
• Proof of insurance
• Vehicle information, if applicable

If you’re planning to make a down payment, the lender may also require proof of funds. 

Bottom line

If you’re in the market for a car, applying for a preapproved loan can save you money and stress. While it can’t guarantee that you’ll get the exact vehicle you want, it will give you a leg up by allowing you to walk into the dealership knowing exactly how much you can afford.