How to Get Pre-Approved for an Auto Loan

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Sep 30, 2023

How to Get Pre-Approved for an Auto Loan

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Few of us have cash on hand or savings to pay for a vehicle outright, which is why getting an auto loan is such a common occurrence once you enter adulthood. But did you know an auto loan pre-approval is not only possible, but it can help you throughout the entire car buying process? If you’ve ever gone through the pre-approval process for a home loan, then you’ll quickly see how similar this process is. If you haven’t, don’t worry — we’ll show you the steps needed to get pre-approved for an auto loan and get out the door with your new ride.

In this article

Benefits of getting pre-approved for an auto loan

Let’s be honest here — most of us dread shopping for a new or used vehicle. But it’s not the questionable sales tactics and slick marketing causing all the frustration. Most of us dread it because of the negotiation process. Getting pre-approved gives you an accurate estimate of how much of a loan you can handle and can make you a more credible buyer. These are two extremely important benefits when it comes to successful negotiations and can put more power into your hands as a buyer, whether you’re working with a car dealership or private seller.

Stronger negotiating power isn’t the only benefit though. Getting an auto loan pre-approval can also help you with:

Budget clarity: Pre-approval provides you with a clear understanding of how much you can borrow, helping you set a realistic monthly payment and budget for your car purchase.
Saving time: Pre-approval streamlines the buying process, reducing the time spent at the dealership or the back and forth with a private seller, so you can have a more efficient transaction.
Knowing the interest rate and terms: With pre-approval, you'll know your interest rate in advance, so you can compare financing options apples to apples and select the one best for your budget.
A hard parameter: We all know a car dealership will try and upsell you as you’re signing the paperwork. By getting a pre-approval, you can simply respond to these upsell and add-on tactics by saying you’re pre-approved for a certain amount and you’re not spending a dime over.

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How to get pre-approval for an auto loan

Once you’re convinced getting the pre-approval is the way to go, it’s time to put your plan in motion. You can break down the process in a handful of steps.

1. Check your credit report

The first step in the process is to check your credit report. While this isn’t 100 percent necessary to get a pre-approval, it does immediately let you know what challenges you may face when you’re working with a lender. It can alert you to any mistakes on your report and give you an idea of what kind of borrower a lender will see you as when they run a credit check. Plus, if your timeline allows, it may even give you a chance to improve your reporting or fix any errors.

Fortunately, it’s super easy to check your credit report and it doesn’t cost a dime either. The three credit bureaus – Experian, Equifax, and TransUnion – continue offering free weekly credit report checks through annualcreditreport.com. The three bureaus recently announced they will continue offering free credit reports weekly so consumers have access to their information, making this a great time for accessing your information.

2. Gather the necessary documentation

You can make the loan application even quicker by gathering necessary information ahead of time and having it ready for the lender’s review. While each lender may have its own set of qualifications or requirements, you can expect to show the following:

Proof of income: Proof of income includes recent pay stubs, W-2 forms, or tax returns that clearly shows your income level.
Proof of identity: You'll need a valid driver's license or another form of government-issued ID.
Proof of residence: A utility bill or rental agreement can serve as proof of your current address, but it’s a good idea to have a couple of forms of proof.
Vehicle information: If you have a specific car in mind then make sure you have the details about the make, model, year, and price.
Employment information: Be ready to provide details about your current employer, including their contact information.

3. Select your lender after comparing

Most banks and credit unions offer options for auto loan pre-approval and make it even easier by offering online applications, in-person, or over the phone. If you’re unsure where to start, you can always start with your current financial institution, which may even make the process easier since you have an established relationship.

You may find it beneficial to get pre-approval from at least two or three different lenders. This helps you compare auto loan rates and terms in black and white, so you know which one offers the best conditions for you. Once you have your information, you can make the final selection.

As a side note, try to apply for the pre-approval within a 14-day period. Whenever a lender reviews your credit profile, it shows up as a hard inquiry on your credit report. If you limit the applications to a 14 day window, it has less of an impact because it appears you’re simply shopping around and comparing lenders (as you should). A hard inquiry can stay on your credit report for up to two years and may slightly decrease your credit score.

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Pre-qualification vs. pre-approval — What’s the difference?

Many people confuse pre-qualification versus a pre-approval because they sound so similar, but they’re in fact different.

A pre-qualification is less impactful. It simply means a lender has performed a soft credit check on your credit report, but doesn’t provide you with set interest rates. Your final interest rate can go up even after a pre-qualification. With a pre-approval however, your interest rate is much less likely to change, so you know you have a solid quote from the lender. Because the pre-approval is more impactful and requires a hard inquiry, you should only seek it if you’re serious about the loan or vehicle.

FAQs

Does pre-approval hurt your credit?

A pre-approval requires the lender to view your entire credit report, which is called a hard inquiry. A hard inquiry stays on your report for up to two years and its impact on your report lessens over the two year period. Overall, it may only decrease your credit score by a few points, so it shouldn’t stop you from getting a pre-approval if you prefer.

How long does pre-approval take?

The pre-approval process can be pretty quick, as long as you provide the necessary information the lender requests. In some cases, a pre-approval can be completed and an answer provided to you within minutes.

Does getting pre-approval guarantee I get a car loan?

No, a pre-approval doesn’t guarantee approval for a car loan. The vehicle you decide on may not meet the lender requirements or there may be a hiccup on your financial information the lender discovers after the pre-approval. However, having one does give you a better idea of what you qualify for and what the monthly car payment will look like.

How can I increase my chances of getting approved for an auto loan?

Shopping around and comparing lenders can help, but you should only apply for a few loans so it minimizes the impact to your credit score. Lenders will look for your debt-to-income ratio, which is how much debt you already have versus your gross income. Increasing your income and/or decreasing your debt can help. Also, you may use a co-signer, which is someone who uses their credit to help with loan approval.

The bottom line

Getting pre-approved for an auto loan is a smart financial move as you embark in the world of vehicle ownership. It gives you a clearer understanding of your monthly payment, what you can afford, saves time on the financial side, and can help you stay within your budget. Many lenders offer streamlined pre-approval applications online, in-person, or through an app, so you can quickly get the information you need as you shop around.

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Sara Coleman is a former corporate gal turned creative entrepreneur. She began writing professionally several years ago and now contributes to multiple websites, blogs, and magazines. She’s also an avid reader and can’t resist a great historical fiction novel. Sara holds a BA in journalism from the University of Georgia and can be found supporting her Bulldogs every chance she has. She resides in Charlotte, North Carolina, with her wonderfully supportive husband and three children. When she’s not ushering her kids to sports and dance lessons, she can be found creating content for her own website, TheProperPen.com.

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