How Do Preapproved Car Loans Work?

If you can’t get a preapproved car loan, don’t sweat it. The following alternatives can help you get behind the wheel until you’re ready to try again: 

• Find a cosigner: When you submit your loan application with a cosigner, lenders typically weigh the cosigner’s creditworthiness against the risk you pose as a borrower. Sometimes, adding a cosigner is all it takes to gain preapproval, but that’s not always true. 
• Save up for a used car: If financing doesn’t work out, you can still purchase a set of wheels by looking at used cars. Driving a used car for several years as you save up and then reselling it before reapproaching auto financing could put you in a better spot financially. 
• Decrease your debt: Although it can be challenging and requires time, paying down your debt can help you earn a higher credit score. Decreasing your debt directly affects your credit utilization, which is a significant component in your score and your chances of gaining preapproval. 
• Boost your credit score: Ensuring a positive payment history, reducing your credit utilization to less than 30%, and addressing any other factors working against your score can help improve your credit report. 
• Subscribe to a car: FINN car subscriptions offer borrowers time to improve their financial standings and test drive several types of cars, from trucks and premium sedans to SUVs and electric vehicles. FINN’s monthly subscription fee includes insurance, registration, maintenance, and depreciation, so you know exactly how much to budget.

If you cannot gain preapproval early in the year, take a few months to get your finances back on track. Then, you can take advantage of Black Friday car deals during the last few months of the year to treat yourself and take on the new year with a new car. 

When a lender preapproves you for a car loan, they extend a temporary loan offer with specific terms, including the approved loan amount, interest rate, and terms. Preapproved car loan offers are only good for around 30 days. Most preapprovals require you to submit to a soft credit check so the lender can review your credit report and score. The terms aren’t guaranteed until the lender performs a hard credit check and adjusts any necessary terms after further reviewing your financial information. 

Preapproved car loans help you conceptualize how much you can spend to finance a car, similar to if you were a cash buyer or had a check from the lender to spend on your purchase. Walking into a dealership with a preapproved car loan offer benefits you in several ways, from acting as a starting point for negotiations to demonstrating your financial ability and desire to purchase a car. While a preapproved car loan offer isn’t a guarantee of approval, it shows the dealership that a lender is willing to work with you as a loan candidate, regardless of the offer terms.  

A preapproved car loan works similar to the fuel-efficiency rating on a car. On paper, the automotive manufacturer states how many miles a gallon of gas is for that particular car in miles per gallon (MPG) as a guideline. However, you probably won’t always see that exact MPG rating because the real-world rating depends on several other factors, including where you live, how you drive, and more. Lenders often preapprove you based on basic parameters but require real-world data about debt, income, and credit behavior with a hard credit check to solidify an offer. 

Auto loan preapproval vs. prequalification 

It’s important to note that preapproval and prequalification describe two different—though related—loan processes. For example, if you’re trying to buy a car with no downpayment, having a preapproved loan offer demonstrates more financial clout than being prequalified. Lenders dig further into your credit history with a preapproval than a prequalification, though some may use the terms interchangeably. Generally speaking, it looks better to a lender if you’re preapproved versus prequalified. 

Preapproved car loan offers lay out specific financial terms to narrow your search for a new or used car. Having a preapproved car loan in your back pocket can benefit you in several ways, including the following: 

• Negotiating power: Besides profiting from their inventory, most dealerships also make money on finance deals. If you present them with your preapproval offer and ask them to beat it and earn your business, many will jump at the chance to bid with a competing offer. 
• Budgeting boundary: It’s easy to coax yourself into spending just a little more on a car you’ve fallen in love with, but with a preapproved loan, you know exactly how much you can spend and how much it will cost you with interest. If the car price, taxes, fees, and titling don’t fit within your preapproval offer, you know how far you’ll have to dig into your savings if you really want that particular ride. 
• Interest rate comparison: Although a preapproval offer doesn’t guarantee terms until you’ve undergone a hard inquiry, it will include the interest rate you qualify for. You can then compare loan rates you receive from other lenders to find the best rate. 
• Credit builder: Receiving a preapproval offer doesn’t boost your score but allows you to qualify for a loan to help you build credit. As an installment loan, a car loan contributes to your credit mix and payment history.

When you obtain a preapproved car loan offer, chances are you’re more likely to seek out and purchase a car with a monthly payment you can afford. Limiting your options to what suits your finances best can also ward off defaulting on the loan and the auto lender repossessing your car. A car loan preapproval informs you so you can make better financial decisions. 

Despite the many benefits preapproved car loans offer, keep in mind the following caveats:

• Limited timing: Preapprovals typically only last for a month, which isn’t much time to comparison shop if you haven’t yet figured out what car you want to buy and where it’s located. Do your research beforehand to narrow the field and set yourself up for success. 
• Terms may change: Lenders offer preapprovals based on a snapshot of your credit behavior. However, you must submit to a hard credit check to solidify the loan terms. Your offer may look different if any factor has changed since the preapproval. 
• Favors good credit: Finding a lender that will preapprove you for favorable terms can be challenging if you have bad credit. Lenders tend to offer more competitive terms to borrowers with higher scores to earn their business. 
• Purchase limitations: Depending on a lender’s policies, you may be required to purchase your next car from a particular dealership if you accept their preapproved car loan offer. You’re then subject to whatever terms the dealership offers and don’t have the option of pursuing cars for sale via a private party.

Auto manufacturers often entice buyers with special financing deals you can’t get with a preapproved car loan. Most lenders offer basic terms with loan payments starting as soon as you make a car purchase, but some car dealerships give buyers two or three initial months with no car payment due. Therefore, looking at the whole picture with lenders is essential to select the best offer. 

Obtaining preapproval for a car loan requires steps similar to figuring out how to buy your first car. Researching, submitting the proper documents, and shopping for a vehicle that fits your budget are all shared steps. You can even use a preapproved car loan offer to buy your first car if you’d like. 

1. Review your credit report

Lenders will review your credit report, but your eyes should be the first to view it. You can request your credit report from Experian, Equifax, and TransUnion annually for free without impacting your credit score. Ensuring the information within your credit report is accurate should be the first order of business. You can also compare your credit scores across credit bureaus to see where you fall compared to other borrowers. 

2. Shop around for a lender

Lenders compete for your business, but it’s up to you to find the one that offers you the best deal. When you shop for a lender, compare interest rates, loan terms, down payment requirements, and any other relevant details. Will the lender let you pay online or limit your loan terms? Finding the answers can help you better understand which lenders work best for you and who you can gain preapproval from when the time comes. 

3. Compile your shortlist 

Since most preapprovals expire after a month, position yourself to move forward with a few different cars based on the terms you receive. Your preapproval loan offer will contextualize purchasing these contenders, from what interest rate you can expect to how much you can afford. While you don’t want to have more than 10 cars on your shortlist, leaving yourself a handful of options can help you tailor your choices to your preapproval offer. 

4. Get preapproved

The process of obtaining a preapproved car loan mirrors that of applying for a credit card. Submit your personal information, employment history, bank account information, and credit report via the lender’s application. Many offer online applications you can fill out in 10 to 15 minutes. 

5. Let the negotiations begin

Now that you have your preapproved car loan offer, you can start hitting the pavement and reviewing your shortlist in person. Once you’ve narrowed your search to a few vehicles, take a test drive to see how the car fits your style. Determine how you want to approach the negotiation process with your preapproval in hand. Keep an eye on the preapproval offer expiration date, but don’t be afraid to walk away if the terms just don’t fit. 

Lenders tend to favor borrowers with higher credit scores. Obtaining preapproval can be challenging if you have a fair or poor credit score. If you have an exceptionally high debt-to-income ratio or your credit report comes back with lapses in payment history, addressing those issues first can help increase your chances for preapproval. Lenders will still work with you if your credit pull reveals you have a credit score of 650 or lower, but the terms often include high interest rates and stricter terms.