A preapproved car loan is a financing offer from a lender that you get before purchasing a car. When you get preapproved, you don’t actually receive the funds. Rather, it shows you how much money you can borrow, and at what interest rate, when you are ready to buy a vehicle.
Getting preapproval for a loan tells the dealership that you’re ready to buy and can sometimes give you the upper hand in negotiating price and financing. If you’re getting ready to go car shopping, consider getting preapproved before you start the process.
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What Does it Mean to Be Preapproved for a Car Loan?
Lenders will sometimes give preapproved car loans to borrowers who qualify for certain loan terms. This is approval for a loan on a conditional basis.
The lender approves an estimated amount of money and an estimated interest rate that the borrower can receive. However, you still have to formally apply for the loan in order to get the money.
Why Should I Get a Preapproved Car Loan?
There are several good reasons to get preapproved for a car loan.
Learn Your Borrowing Limit
Sometimes, it can be hard to know exactly what kind of budget you should have for a new car. When you go through the preapproval process, you’ll learn exactly how much money you can spend, which can be helpful when car shopping.
Preapproval also helps with budgeting your monthly payments. It shows you exactly how much of your monthly income you can afford to put toward a vehicle.
Choose a Realistic Vehicle
When you start car shopping without a budget in mind, you might be looking at vehicles that are outside of your budget.
If you get preapproved for a loan, it can help you narrow down your options and choose a vehicle that you can realistically afford, based on the monthly loan payments.
Without preapproval, you could end up getting your heart set on a car that’s priced above your borrowing limit.
Gain Power in Negotiations
Most car dealerships offer loans, which is another source of their profit. If you get preapproved, you can often use your preapproval letter as leverage to get a better deal.
Ask the dealership if they can match or beat the loan you were already preapproved for. It might also give you additional leverage when it comes time to negotiate the final car price.
How Do I Get Preapproved?
Follow these steps to get preapproved for a car loan:
Check Your Credit
Lenders look at your credit score and credit history to determine your interest rate and loan terms. Checking your credit before getting preapproved can give you an idea of what interest rate you might qualify for.
You can often check your credit score through your credit card company, but you can also use third-party sites, like Credit Karma.
Gather Information Required
To simplify the process of getting preapproved for a car loan, make sure to have your information ready. Not only will lenders check your credit, but they will also typically ask for the following information:
- Employment information
- Personal identification (driver’s license or passport)
- Social Security number
- Income information
- Outstanding debt amounts (student loans, mortgage, etc.)
- Tax documents (previous federal returns)
Get Multiple Offers
You will probably find that different lenders can offer you different loan terms. You don’t necessarily need to choose the first loan you get preapproved for. It’s a good idea to shop around for car loans just like you shop around for cars.
Having a few preapproval letters in hand when you go to the dealership might also give you an advantage when negotiating price. Plus, it could also help you get a better loan offer from the dealership’s lending partners.
A preapproved car loan usually expires after a month or two, and you don’t have to use a loan you’ve been preapproved for. Once you’ve found your vehicle, choose the loan that works best for you and let the others expire. You can also contact the lenders to let them know you won’t be using their loans.
What Are the Requirements for Preapproval?
You’ll need to meet a few basic requirements before getting preapproved for a car loan. All car loan offers are “subject to credit approval,” so even if you see a great deal advertised, you still need to have good credit to take advantage. Some lenders also require a certain level of income, depending on the loan amount.
On your loan application, you will likely need to include the following income information:
- Gross monthly salary or income
- Other sources of income including:
- Disability
- Retirement
- Child support
- Alimony
Lenders ask about your income because it indicates how likely you are to pay back the loan. If you have a low income but are asking to borrow a large amount of money, the lender might offer a higher interest rate to offset the potential risk. Ultimately, lenders want to avoid borrowers becoming delinquent on a loan.
What If I Can’t Get a Preapproved Car Loan?
If you have trouble getting preapproved for a car loan, there are a few ways to improve your chances of approval in the future.
Boost Your Credit Score
Borrowers with poor credit often have a much harder time getting preapproved for loans. If your credit is low, you should improve your score before you apply again.
One of the main causes of bad credit is late payments or a poor credit utilization ratio. Set reminders to pay your bills on time or enroll in automatic payments. If possible, pay off any outstanding debt you have on credit cards.
Your credit utilization ratio is how much available credit you have and how much of it you’re using. Work on keeping this ratio under 30%. The lower the ratio, the better your credit score will be.
Increase Savings
If you’re struggling to get preapproved for a car loan, increasing your savings can be beneficial.
When you focus on saving, you won’t have to borrow as much money when you decide to buy a car. Even if you don’t have a high income or perfect credit score, you might have a better chance at getting preapproved if you apply for a smaller loan.
Find a Co-signer
A co-signer with good credit can be the difference between approval and rejection. A co-signer can be any individual who is willing to assume your debt if you default on the loan. Keep in mind that if you fail to pay back your loan, it will negatively affect both of you.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
