Why and How You Should Get an Auto Loan Pre-Qualification

Getting a new car whether it’s used or has zero mileage can be an exciting moment for most buyers, but don’t jump the gun and apply for just any auto financing. Use prequalification tools and preapprovals to make smart decisions about your next vehicle loan. 

First, let’s learn what place each of these holds in the car buying process. 

What Is An Auto Loan Pre-Qualification?

There’s no need to hurt your credit score when looking for a new car. The process of prequalifying for an auto loan can give you a rough idea of the financing terms you’ll get and how much of a loan amount you can afford without doing a hard inquiry on your credit. 

A prequalification is a soft inquiry into your credit history to find out what financing terms might be available to you. It doesn’t mean that you’ll be approved for the loan though. 

In some cases, the decision could change once an in-depth review of your credit is completed during a pre-approval credit check. The approval has to be finalized by the lender before using it to purchase your new vehicle.

Despite being an estimated amount with a soft credit inquiry, it’s still a valuable tool to plan your budget before heading to the dealership. In just minutes, you can get a general idea of how much you can spend and use that information to look for cars that fit within your range. 

You only need a few pieces of information to get a pre-qualification and it can be performed online, in person, or over the phone with any major bank or credit union. You should come prepared with your: 

• Current income
• Employment information
• Debt obligations (rent, credit card payments, utilities, etc.)
• Personal identification

How Does a Soft Pull Affect Your Credit Scores?

A soft pull doesn’t affect your credit score at all. Your permission isn’t required to do a soft credit check. 

In fact, if you look at your credit report, you’ll likely see some soft pulls listed from companies sending you pre-qualification letters in the mail for everything from credit cards, and personal loans, to auto refinances. 

They’re already happening, but now you know you can use them to your advantage.

If you’re recovering from past credit issues, you might not want to risk your score on a hard credit check to see what you qualify for until you’re ready to move to the preapproval process. 

Doing an auto loan prequalification soft pull can be a great way to narrow down your financing options to lenders who want to work with borrowers with bad credit. And it doesn’t hit your score the way that a hard credit inquiry does. 

Since a soft credit pull doesn’t affect your credit score, you can do a ton of them in preparation for a formal auto loan preapproval. This makes it easier for you to do your research on which financial institutions to put in your loan application while maintaining excellent credit hygiene.

How Hard Inquiries Affect Your Credit Scores

A hard credit inquiry affects your credit scores in a few different ways: 

• It lowers your score by three to five points
• It stays on your credit history for two years
• Multiple hard pulls can make your score drop more if not done properly

A hard credit inquiry lets credit bureaus and lenders know you’re ready to open a new credit account. So when multiple hard inquiries are done for different purposes at the same time, lenders might view this as a signal of financial desperation. 

The exception is when you apply for the same loan type with multiple lenders. Credit bureaus recognize that behavior as shopping around for the best interest rates. 

After going through the prequalification process, you’ll likely have three or four lenders you want to submit applications with. Just make sure you’re aware of your credit score before you apply and check out the article, What Is A Good Credit Score to Buy A Car, for detailed information.

So when you’re ready to get preapproved for your new car, be sure to include all of your auto loan preapproval applications in the same 14 to 45 day period. This ensures all of your hard inquiries will be counted as one. 

How an Auto Loan Prequalification Can Help

Three of the best ways prequalifying can help with a new car loan:

• Narrowing down auto financing options to lenders who are more likely to approve you.
• Identifying the lower interest rate auto loans without dinging your credit report.
• Rough estimates and budgeting for your vehicle loan.

A prequalification can save you time, money, and points on your credit report. Spend just a few minutes filling out the information to prequalify for an auto loan online with a bank or credit union and you can get an estimate on how much you might get approved for. 

That’s information you’ll need when deciding what car you want and what your monthly payments could look like. Prequalifying allows you to plan and take advantage of the best offers for your income and credit profile.

For borrowers with poor credit, this can be a lifesaver, especially if you were expecting to take the hit on your credit report for multiple denials when applying for an online auto loan through your bank or credit union.

What happens if the prequalification comes back for less than you’d hoped? If the car you want is out of reach, you can avoid disappointment at the dealership. Narrow down your options ahead of time or find out what it takes to close the gap on the car of your dreams.

Preapproval vs. Prequalifying

While these two terms are sometimes used in place of each other, there are distinct differences that are important when it comes to your credit score. 

Preapprovals: 

• Do a hard pull on your credit report and look at your FICO score
• Formal approval from a financial institution for a set loan amount
• You’re considered a “cash buyer” when you go to the dealership
• Can be used to negotiate better rates at the car dealership
• Still requires a finalized loan decision and loan closing 
• The car you choose has to meet the lender’s standards 
• Requires confidential information, like your social security number, and specifics on your debt payments.  

Prequalifications: 

• Performs a soft inquiry on your credit
• A more informal way to see what you qualify for (it could change after preapproval).
• Not a solid negotiating tool
• Doesn’t guarantee a specific rate or terms
• Doesn’t require specific car information
• Only needs basic information about income, employment, and personal identification. 

There’s no such thing as an auto loan preapproval soft pull because preapprovals are a hard inquiry. Prequalifying is just a soft pull.

Prequalification helps you avoid unnecessary hard inquiries when you’re planning for your car loan, lease buyout, or auto refinance loan. 

And yes, you can prequalify for a lease as well. If leasing a car is an option you’re considering, it might be helpful to read Can You Lease A Car With Bad Credit? 

Alternatively, preapprovals help you shop for the best auto loan rates when you’re seriously considering which lender to use when pursuing those options. 

How to Get Preapproved for an Auto Loan

A preapproval requires most of the same information that a prequalification does, but it comes with a hard inquiry which can temporarily knock a few points off of your score.

To avoid boatloads of hard inquiries while looking for the best rates, you can process all of your preapproval loan applications within the same 14-45 day period so they’re counted as one inquiry. 

Even if you do get preapproved, you’re not obligated to use that financing company just yet. You can still explore other offers until you make a final call. Until you complete the loan closing, you’re not tied into anything yet.

Most times the application is fairly easy to submit whether it’s online, in person, or over the phone, and only takes a few minutes of your time. Timeframes on getting a decision back can vary depending on the lender and the complexity of your application. 

As you get the information back about what you’ve been preapproved for, you’ll see a breakdown of what the financing details are on the loan which can help you make a more informed decision on which one to go with. 

You should see clear details on: 

• Loan amount
• Interest rate
• Loan term
• Monthly payment
• Total amount financed

All of these car loan aspects are important, but you should be focusing on your monthly payment to ensure this new car fits into your budget. 

Your annual percentage rate (APR) or interest rate will determine how much of your loan repayment is going towards interest and directly affects your total amount financed. 

The total financed amount is how much money you’ll pay over the course of the loan which includes the principal, interest, and any fees. 

The loan term will dictate how long you’re making payments for and is usually quoted in the number of months instead of years. So if you want to trade up to a new car or be done with your monthly payments in three years, you’ll want to look for a 36-month loan term.

Dealership financing can often be more expensive than if you were to go through a traditional bank. Many times the best deals are right under your nose at the same financial institution you have your primary bank accounts, credit cards, and other loans at. 

So check there first. 

To avoid falling behind on monthly payments, it’s a good idea to opt for automatic payments. In some cases, it might even earn you a small discount on your loan depending on the bank you go with. 

All in all, prequalifying is an essential step in the car buying process that many people skip. But make no mistake, it can help you plan your budget, save money and avoid extra hard inquiries before you move on to getting preapproved. 

Leverage the negotiating power of a preapproval to get the best deal when you buy your car and you might just be surprised with what you walk away from the table with!

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