How to get preapproved for a car loan

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If you plan to take out an auto loan for an upcoming vehicle purchase, it is wise to first secure preapproval. Preapproval is a formal offer from a lender with conditions outlined that provide an initial estimate of the expected cost of vehicle financing. It can be very helpful when calculating monthly costs and can help you negotiate like a cash buyer. 

How to get preapproved for a car loan

If you decide that getting preapproved for a car loan is right for you, you must gather the necessary documents and submit a preapproval application.

1. Determine your budget: Look at your budget to figure out how much you can afford to spend on a car. Include fuel, insurance, maintenance, inspection, repair and registration costs. As a general rule of thumb, all vehicle expenses should be 20 percent of your monthly income or less.
2. Gather your supporting documents: Have your pay stub, employer information and personal information on hand when you apply. This will help avoid hiccups and speed up the application process.
3. Shop around: Compare at least three lenders that offer the loan amount and term you are looking for. Don’t settle for the first lender you find, and check out customer reviews to see if there are any red flags.
4. Apply for preapproval: Once you’re ready, you can visit your lenders’ websites or apply in person. You will likely have to fill out a few forms. Be prepared to spend at least 15 minutes on each application.
5. Go to your local dealership: You can then shop around for a car, knowing exactly how much you can afford. If the dealership is able to beat your preapproval deal, there is nothing stopping you from taking that offer instead.

Once you have been preapproved, you will have a firm idea of how much you can spend and will be in control when it comes time to negotiate. Preapproved car loans are typically valid for 30 to 60 days.

Information you need to provide to prequalify or be preapproved

Preapproval and prequalification require some of the same information. Be prepared to provide:

• Personal information, such as your name, address and phone number.
• Financial information, including your income and housing payment.
• Information about the loan, including how much you want to borrow.

Preapproval will likely require you to submit more information, including your Social Security number and birthdate so the lender can pull your full credit report. This is known as a hard credit pull and will temporarily lower your credit score by a few points.

Why getting a preapproved auto loan saves you money

With preapproval, you can shop with confidence, knowing that you will most likely get the same or very similar interest rate. You can also use your preapproval rate as a point of negotiation with the dealership once you enter the financing office, putting pressure on them to beat that rate.

What to keep in mind with auto loan prequalification and preapproval

When you prequalify for an auto loan, you get a rough estimate of what loan amount and rate you will be offered. You can then use this information to shop around for the best deal, but be aware that prequalification is not an official offer.

Rates aren’t guaranteed — and their validity is dependent on how accurate the information you provide is. Preapprovals also aren’t guaranteed. 

If your income, employment or credit drastically changes between when you are preapproved and when you fully apply, you may be denied the loan. Remember this while shopping, and be careful about your spending — especially with credit cards.

Bottom line

Preapproval or prequalification are useful tools for gauging how much you can spend on an auto loan. Preapproval can even help you get a better rate at the dealership if you’re considering financing through it. But the offers aren’t guaranteed, so spend wisely while you’re shopping.