Auto Loan Prequalification Vs. Pre-Approval
Prequalification and preapproval are two different methods to get a first read on your car financing options. Prequalification is less rigorous and only requires sharing basic information about your financial situation, and provides you with an estimate of the rate and terms you may qualify for. Pre-approval requires you to share more personal and financial information with a creditor because it is essentially a partial request.
The difference between prequalification and preapproval
A pre-approval is a formal offer from a lender, with terms attached, and pre-qualification is an estimate of the car loan terms you may qualify for. Because a prequalification is not firm, it is not very helpful when negotiating at a dealership.
But whether you opt for a pre-qualified or pre-approved car loan, offers are also not guaranteed – final approval will depend on the lender’s underwriting department which will find no surprises in your complete credit history and additional factors, such as employment and income verification.
Benefits of auto loan pre-approval and pre-qualification
Pre-approval and pre-qualification give you a good idea of how much money you can borrow and how much you will pay to borrow it.
Benefits of pre-approval
With pre-approval, you can shop with confidence knowing that you’ll most likely get the same or very similar interest rate. You can also use your pre-approval rate as a bargaining point with the dealership once you walk into the finance desk, lobbying them to beat that rate.
Benefits of prequalification
Prequalifying is a low-risk way to find out what kind of loan you might get, especially if you’re not ready to start shopping seriously. Your credit score is not affected since the lender will not perform a rigorous credit check.
What to keep in mind with auto loan prequalification and preapproval
When you prequalify for a car loan, you get an approximate estimate of the loan amount and rate you will be offered. You can then use this information to search for the best offer, but be aware that prequalification is not an official offer.
Rates are not guaranteed and their validity depends on the accuracy of the information you provide.
Pre-approvals are also not guaranteed. If your income, employment, or credit changes drastically between the time you are pre-approved and the time you fully apply, you may be denied the loan. Keep this in mind when shopping and watch your spending, especially with credit cards.
How to get pre-approved for a car loan
If you decide that pre-approval for a car loan is right for you, you will need to gather the necessary documents and submit a pre-approval request. It is recommended to research several reputable lenders before applying.
Once you’ve been pre-approved, you’ll have a clear idea of how much you can spend and be in control when negotiating. Pre-approved auto loans are generally valid for 30 to 60 days.
If you are denied pre-approval, there are a few steps you can take. Check your application for errors, increase your down payment, reduce your overall debt, or try another lender. Before trying with another lender, however, discuss the reason for the denial with the one you applied with.
Information you must provide to prequalify or be preapproved
Pre-approval and pre-qualification require some of the same information. Be prepared to provide:
- Personal information, such as your name, address and telephone number.
- Financial information, including your income and housing payment.
- Loan information, including the amount you wish to borrow.
The pre-approval will likely ask you to provide more information, including your social security number and date of birth, so the lender can pull your complete credit report. This is called a hard credit draw, and it will temporarily reduce your credit score by a few points.
The bottom line
Pre-qualification and pre-approval are two useful tools when it comes to assessing how much you can spend on an auto loan. Pre-approval may even help you get a better rate from the dealership if you plan to finance through them. But deals aren’t guaranteed, so spend wisely while shopping.