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How Does Auto Loan Preapproval & Prequalification Work?

How Does Auto Loan Preapproval & Prequalification Work?
LeeMarie Kennedy
LeeMarie KennedyUpdated September 15, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Before taking a stroll across the showroom floor, you might want to think about how to secure the best possible deal on your next car.Auto loan prequalification and preapproval are two different ways to get a sense of what kind of financing you might be able to get from a potential lender before sealing the deal — or even going to the dealership. Sometimes you may see the two terms used interchangeably. But they’re not identical, and it’s important to understand the similarities and differences between the two.Below we describe how auto loan prequalification works and highlight how to buy a car with preapproved auto loan financing.

What Does Preapproval Mean?

Auto loan preapproval is a way that you can find out from a potential lender what kind of offer it is likely to extend to you for a car loan. That includes the lender’s estimate of the amount of money it will be willing to provide. The offer is conditional and the terms are just estimates, but the preapproval is based on a thorough review of your finances. In order to be preapproved, you typically have to provide information about your identity, address, income, and employment status. And lenders will typically do a hard credit pull to verify your creditworthiness.If a lender preapproves you, typically you receive a letter from the lender listing the exact loan terms, interest rate, and the amount you can borrow. Preapprovals typically expire in 30 to 60 days, so it’s wise to request one only when you’re serious about buying your car soon.Remember that getting preapproval does not mean that you have gotten the loan. You could still be refused or the terms could change, especially if your financial situation changes before you take out the loan — if, for instance, you lose your job.

What Does Prequalifying for a Car Loan Mean?

Lenders may offer prequalified car loan financing. What does prequalified mean? Auto loan prequalification is another way for a would-be borrower to determine whether they’re eligible to receive a loan from a lender. But prequalifying is typically less rigorous and has fewer requirements than preapproval. If the lender does a credit check for prequalification, it will usually be a soft pull.If you want to be prequalified for a car loan, you’ll likely be asked to provide your financial information to a lender or institution, which may also do a soft credit check. Then, if you are prequalified, the lender will offer you an estimate of what you might receive. As with preapprovals, these numbers are not set in stone and can change before you purchase a car or you could even be denied the loan, especially if your information changes.

Preapproval vs Prequalification: What’s the Difference?

The below table compares preapproval vs. prequalification:
What is it?A detailed letter or quote (sometimes a check) from a lender that specifies how much it can offer a potential borrower, based on a comprehensive review of the borrower’s personal and financial informationAn estimate of how much financing a borrower might be eligible for based on personal and financial information provided by the would-be borrower
How rigorous are the requirements?May require extensive paperwork, such as bank statements, W-2s, and a Social Security numberInformation is typically self-reported and there are usually fewer formal requirements
How long does it take?Could take several minutes online, possibly longer in some casesCan be processed quickly over the phone or online
What kind of credit inquiry is involved?Lenders may conduct a hard inquiry on the borrower’s credit report, which can affect the borrower’s credit scoreTypically involves a soft credit pull, which doesn’t affect the borrower’s credit score
Why get one?Provides a more detailed and definitive estimate of how much a lender is willing to loan a specific borrowerGives a general estimate of how much the borrower might be able to borrow and what the loan terms might be
How important is it?Signals that the borrower is a serious buyerIsn’t typically considered as significant or definitive as a preapproval letter
Prospective car buyers don’t necessarily have to choose between prequalification and preapproval. Prequalification can be an initial step, when you’re at the browsing stage. But when you get serious about your car purchase, you may want to get preapproved.Bear in mind that, unlike prequalification, preapproval typically requires a hard credit pull, which can have a negative impact on your credit, so you don’t want to take it lightly. But it can also signal to car dealers that you are a serious buyer — and that you’re not reliant on the dealership for funding.

What Are the Benefits of Getting Preapproved?

Below we highlight several benefits to getting preapproved for a car loan:

1. It Can Reduce Purchasing Guesswork

Getting preapproved can make it easier to visualize the exact terms of a car loan, so you can have a firm budget in mind before you even start to shop. With a clear idea of how much you can spend, you can focus on vehicles that fall within that price range so you’re fully prepared when it’s time to start making monthly payments.

2. It May Create Negotiating Power

When you have a preapproval in hand, it lets dealers know you’re a creditworthy buyer who doesn’t have to be dependent on their financing. This may give you an extra bit of negotiating power, which can remove some of the stress from the car purchasing process. When you have a preapproval in hand, car salespeople may be less likely to try to pressure you into dealership financing options that cost more than you’re comfortable paying.

3. It Can Help You Avoid Upsells

When it’s time to sit down and sign the paperwork, having a preapproval letter can help you stave off unnecessary upsells and add-ons if you assert that you’re not willing to go over the preapproved amount. In some cases, the dealer might even try to beat the preapproval rate, helping you lock in a better deal.

Are There Any Disadvantages to Preapproval?

One of the disadvantages to preapproval is that you may have a limited time to act. Your preapproved car loan letter offer may expire within 30 to 60 days. That means your preapproved financing and interest rate could fall through if you fail to take advantage of the offer before it expires.You may apply for preapproval a second time if your initial preapproval letter expires, but there’s no guarantee you’ll be preapproved. Even if you are preapproved a second time, the terms and conditions of your second preapproval may not be right for you. The second preapproval letter could potentially feature a higher annual percentage rate (APR).A preapproved car loan letter offer may also restrict where you can buy a vehicle. For example, a lender may require that you buy a car from its list of authorized dealers. A lender’s list of authorized dealers may exclude certain sellers, which can limit your car buying options.Another disadvantage to preapproval is that it’s not equal to full approval. A lender may cancel your preapproved loan letter offer if you fail to meet its underwriting and qualification standards on the date of sale. If you get preapproval for a car loan, there’s still a chance you may be denied financing.

How Do You Get Preapproved for a Car Loan?

If you’re wondering exactly how the car loan preapproval process works, here are six steps on how to get preapproved for a car loan:

1. Estimate Your Budget

Try to assess what you can afford to spend by way of down payment initially and then every month for your payments.

2. Review Your Credit Report

Before issuing a preapproval, lenders will typically review your credit history to see if they think you’re likely to repay the loan on time. In order to do this, the lender generally conducts a hard inquiry, which can have a direct impact on your credit score.It can be a good idea for you to review your credit report before meeting with a lender. That way, you can help ensure there are no unexpected issues. If any of the information on your report is incorrect, you can dispute it before the lender makes the credit inquiry.

3. Gather Information About Your Ability to Pay

Lenders will also typically want extensive personal and financial information to show that you’ll be able to afford the payments. It can be helpful to start pulling this information in advance so you’ll have it ready. Consider preparing the following:
  • Proof of employment status
  • W-2s and any other income verification information
  • Social Security number
  • Identifying documents, such as driver’s license, military ID, state ID,  or passport
  • Proof of assets

4. Review Loan Preapproval Terms

You’ll want to be sure that the deal you’re offered meets your needs. Factors to examine can include:
  • Loan amount: This is the total amount you can borrow. You can generally take out less money, if you so choose, since this may be more than you want to take out or may require higher monthly payments than you can make.
  • Loan term: This is how long you will be paying the loan back.
  • Interest rate and APR: This will let you know how much the loan is costing you.
  • Monthly payments: This is how much you will have to pay the lender back each month.
Recommended: Car Loan Terms Explained

5. Shop Around For the Best Loan Offer

Generally speaking, simply taking the first loan offer you receive is not the soundest borrowing strategy. Getting multiple car loan offers from a few different lenders can help you review and compare different loan features in depth, helping you get a desirable rate with terms that stay within your budget.

6. Hit the Dealership Floor

Once you’ve received auto loan preapproval from multiple lenders, it’s time to take the best offer to the showroom and start shopping around. Since most preapprovals expire within 30 to 60 days, it’s wise to apply for preapprovals within a short period of time and then get to the dealership sooner rather than later.

Tips for a Smooth Car Loan Preapproval Process

Here are some tips for how you can approach the car loan preapproval process:
  • Shop around and compare rates. Banks, credit unions, and private lenders may offer preapproved car loans. You can shop around and compare rates from different financial institutions. Comparing terms can help you buy a car with financing that’s right for you.
  • Understand hard inquiries. A hard inquiry can remain on your credit report for two years when you apply for consumer loans. The initial impact can cause your credit score to drop several points, but credit scoring models may calculate multiple hard inquiries as one inquiry if you’re shopping around for car loans over a short period (typically within 14 to 45 days at the maximum).
  • Be familiar with auto financing. There are different types of car loans. Getting secured or unsecured auto financing from a bank can be difficult with bad credit, but other lenders may offer subprime auto loans at high rates of interest. 
  • Search for deals online. Going to brick-and-mortar retail banks to apply for car loans can be time-consuming. You may save time by applying for an auto loan online.
  • Don’t confuse preapproval with final approval. Getting preapproved for a car loan doesn’t guarantee final approval. Auto lenders may cancel your preapproved loan offer if your financial circumstances change for the worse. It can be helpful to know when a car loan is finalized.

Who Can Preapprove You for a Car Loan?

Here are some of the financial institutions that may offer you a preapproved car loan:
  • Banks
  • Credit unions
  • Private lenders
The way how auto loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include APR finance charges.Borrowers are expected to provide proof of identity and proof of income when applying for auto loan financing, among other auto loan requirements.

Does Preapproval Guarantee Getting the Car Loan?

As mentioned earlier, getting preapproved for a car loan doesn’t guarantee final approval. Auto lenders may cancel your preapproved loan offer if your financial circumstances change for the worse.Some lenders, for example, may revoke the preapproved offer letter if you experience a large and sudden increase in your debt-to-income ratio.In terms of how to buy a car with preapproved financing, you simply need to meet a lender’s underwriting and qualification standards on the date of sale. Meeting those standards may give you full approval to purchase a vehicle with your car loan. Here are several auto loan shopping tips that may guide you in the car buying process:
  • Set your budget, including your target purchase price 
  • Check your credit report and scores before car loan shopping
  • Consider whether you’ll need a cosigner 
  • Shop for car loans from multiple sources
  • Consider getting prequalified or preapproved 
  • Read the fine print before committing to an auto loan

How to Buy a Car with a Preapproved Loan

You can get preapproved for a secured auto loan before going to a dealership. Here are the basic steps of buying a car with preapproved financing:
  1. Apply for a preapproved car loan with a financial institution
  2. Receive your preapproved car loan blank check
  3. Go to an eligible car dealership
  4. Look at the new or used vehicles within your budget range
  5. Test-drive any new or used car that you like
  6. Negotiate for a sales price that’s right for you
  7. Buy the car with your blank check auto loan
  8. Have your lender listed as the lienholder on the car title
  9. Drive off the lot as the owner of the financed vehicle
  10. Make car loan payments in accordance with the terms and conditions of your financing agreement 
The best auto loan interest rate is 0% APR, but subprime auto loans can exceed 14% APR when buying new cars and 20% APR for used cars.The average interest rate on new car loans stood at 6.63% during the second quarter of 2023 and 11.38% for used car loans, according to Experian®.Recommended: Tips for Saving Money on a Car

What Are the Benefits of Getting Prequalified?

Prequalification is a way to get a better idea about your odds of approval and the loan terms you might be likely to get before you submit a loan application. Some of the other benefits of getting prequalified can include the following:

1. You Get a Take on What You Qualify for

Getting prequalified may be less intensive than getting preapproved, but it still paints a pretty detailed picture of how creditworthy you look to a lender. Seeing what responses you get from potential lenders can give you a good sense of what kind of loan you’re likely to be offered.

2. It Gives You a Sense of Your Budget Limits

Going through the prequalification process may not give you a definitive loan offer, but it can help you estimate how much loan you’re likely to get and how much you can expect to pay in monthly payments before you even enter the dealership.

3. It Doesn’t Impact Your Credit Score

Getting prequalified for a loan offer typically doesn’t impact your credit score, so there may be no downside to exploring whether you prequalify for financing.Consumers may ask, “What happens to car loans when someone dies?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.If you’re drowning in car loan debt, you may wonder, “Can someone take over my car loan?” Transferring an auto loan can be a complex process, but it may be an option for you.

Are There Any Disadvantages to Getting Prequalified?

One of the disadvantages to getting prequalified is it implies you might get approved for a loan but doesn’t guarantee anything. This means you need to submit an application to know for sure whether the lender will approve your request for financing. Submitting a loan application may require a hard pull inquiry, which can cause your credit score to drop by a few points.Another disadvantage to getting prequalified is lenders may not honor the APR and repayment terms as outlined in your prequalified loan offer. This means the lender may approve you for financing at a higher rate of interest than outlined in your prequalified loan offer.A major disadvantage of getting prequalified is it may not be a reliable indicator of what the lender will do if you submit an application for auto loan financing.

How Do You Get Prequalified?

The process of getting prequalified for a loan is somewhat similar to getting preapproved for a loan, though typically a little less rigorous. Here are a few steps you might typically take:

1. Determine Your Budget

As with preapproval, the first step in the prequalification process is figuring out a budget that fits your financial goals so there are no surprises after you drive off the lot.

2. Gather Information for Lenders

Your potential lender will likely want to know about your identity, income, employment status, and current debt obligations. Having things like your Social Security number, photo ID, proof of income, and housing payment info handy can be helpful. In most cases it will also make a soft credit pull, so if you have concerns about your credit you may want to look at your credit report prior to contacting a potential lender.

3. Pay Close Attention to the Loan Terms

Prequalification isn’t considered a guarantee of loan approval. So this is a good time to review the loan terms — before any formal agreement. Here are some figures to review in detail:
  • Loan amount: How much you can borrow from the lender
  • Loan term: How long you’ll have to repay the loan
  • Interest rate and APR: How much you’ll pay the lender in auto loan finance charges each year as a percentage of the outstanding loan balance
  • Monthly payments: Your minimum monthly payment over the loan’s lifespan

The Takeaway

Regardless of whether you apply for car loan prequalification or preapproval — or end up doing both sequentially — you may be able to use the processes to your benefit. Both options can potentially help you develop a budget before you begin shopping seriously. Just remember that asking for a preapproval serves as a more formal declaration that you intend to buy a car (and takes more work), while getting a prequalification is a more casual request for an estimate of what a lender could offer you.Once you purchase your car, even if you get a good deal, you may eventually want to refinance. Lantern by SoFi can help you explore your auto refinance rates. Just fill out one easy form, compare your options, and select an auto refinance lender of your choice.Lantern can help you compare prequalified rate offers in minutes.

Frequently Asked Questions

Does car loan preapproval hurt your credit score?
Can you be denied an auto loan after preapproval?
How long does car loan preapproval take?
Photo credit: iStock/erdikocak

About the Author

LeeMarie Kennedy

LeeMarie Kennedy

LeeMarie Kennedy is a Boston-based copywriter and content creator with over a decade of experience writing for a variety of publishers, institutions, and corporations. She has spent the last few years focusing on writing for financial services, technology, HR and TA, and health & wellness sectors. LeeMarie has a BA in Journalism from Quinnipiac University and a MS in Organizational Communication from Northeastern University and was an original contributor to The Daily, SoFi's newsletter.
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