What Is a Preapproved Car Loan & Why Get One?

Preapproved car loans are loans that are already approved (with some conditions) by lenders after an analysis of your credit report. Read more in this article to explore the advantages and disadvantages of getting one. 

Preapproved car loans are a great way to get into the car buying market and save yourself some extra cash. They are loans that a lender has already approved, subject to conditions.

Once preapproved, head to a dealership and speak to a salesperson, as you’ll be in a better position to haggle the price down. Dealers will assume you’re serious about buying a car should you go in with your preapproval secured.

It is worth noting that a preapproval doesn’t guarantee you anything, it just shows what a lender would be willing to give you. They will still need to run a hard credit check to ensure you can keep up with the payments, so make sure everything is in order on your credit report.

When a lender has given you a preapproved auto loan, that means they’ve given you conditional approval up to a certain amount. 

The interest rate, loan amount, and loan terms that the lender is willing to give you are all specified in the preapproved auto loan offer letter. You can enter the showroom knowing exactly how much you can spend on a new vehicle, just like a cash buyer would.

Simplified process

In addition to having a realistic budget in place, being preapproved is like having cash in your pocket while looking around for the best car price. You won't have to worry about things like down payments, loan conditions, or interest rates and can concentrate on the car buying process.

Interest rates

A preapproval gives you a standard to measure other loan offers. To see what is available, complete the preapproval application at your dealer. Several dealerships provide affordable financing to streamline the payment process and entice customers to finance with them.

Budget

Your lender will determine the maximum loan amount when you receive an auto loan pre-approval based on your credit score and other variables. Don't overlook additional costs like fees and taxes. For example, if you’re preapproved to borrow $20,000, it would be wise to pick a vehicle that costs less.

Negotiation

You can concentrate on negotiating the out-of-door price rather than the monthly payment because you don't depend on the dealership for financing. But keep in mind to hold off on revealing how much you are willing to pay upfront.

Credit score

When you make regular payments on your auto loan, you can quickly rebuild your credit score. Getting pre-approved and then purchasing a vehicle and making your payments on time will drastically improve your overall score.

Timing

These types of loans are only active for a short period of time, usually around 30 days. This means you may have to rush around and find the car you want against a strict timeframe.

Guarantees

There are no assurances that the lender will fund the loan. You can be turned down for financing if your application and supporting documents are inconsistent or if your credit score falls drastically in the period following preapproval.

Credit score

It could be difficult to be pre-approved for an auto loan with favorable terms if you have bad credit. To find out which lenders might be open to working with you, it is definitely worth doing some research on what credit score is needed, before making a trip to the dealership. 

Limitations

If you are approved, it usually means you will have to buy your next car from a dealership your pre-approval supports. This means you can’t hunt around too much for the best deal, or even go down the route of buying privately.

Manufacturer financing

Some manufacturers have excellent 0% financing deals available for those with excellent credit. Sadly, you won’t be able to go down this route if you choose to get pre-approval.

1. Know your credit score

The interest rate you will pay for a car loan will mostly depend on your credit score. Scores range from 300 to 850, and knowing yours lets you know what interest rate to anticipate from a lender as well as any potential loan application issues. You can also use it to review your report for mistakes.

2. Shop around

Similar to the car you want, loans come in a variety of price ranges. For the same credit score, different lenders may offer different interest rates and may have varied requirements for down payments, the total amount they will lend for a new car, and the maximum number of months to repay the loan.

3. Get prequalified

You can prequalify for a loan with a number of lenders if you are unclear about what to expect in terms of your credit rating. Prequalifying is different from getting a preapproval; these less formal inquiries do not obligate the lender to actually make the loan or ensure you'll receive the projected rate offered.

4. Get preapproved

When you're ready to apply, you can get preapproved online or in person by visiting the websites of your lenders. There will be many forms that will need to be completed on your end. Expect to work on each application for at least 15 minutes.

You will need to provide some basic details in order to get preapproved for an auto loan. Expect to submit the following:

• Basic personal information

• A list of your employment history

• Address information for the past three years

• Bank account information

• A full copy of your credit report/score

The lender will need to run a soft credit check, so make sure your accounts are all in order and the information on your credit report is accurate.

5. Visit your local dealer

Now that you know exactly what you can afford, visit your local dealership and shop around for the best deals that suit your budget.

Applying for a preapproved loan when you're looking to buy a car can help you avoid stress and save money. 

Even though it can't ensure that you'll obtain the precise vehicle you want, knowing how much you can afford before you enter the shop will offer you an advantage in the competitive car buying process.