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Before you start car shopping, you don't have to get preapproved for an auto loan, but it can make the process easier and quicker. It shows a dealer that you're a serious buyer who's conditionally approved to purchase a car up to a set amount.
Just know that if you get preapproved, you have a limited time to make your car purchase with that particular loan offer. An auto loan preapproval is often good for 30 to 60 days, so it's best to complete the process close to when you're ready to buy, especially if it lets you lock in an excellent interest rate.
Why Get Preapproved for an Auto Loan
Again, getting prequalified or preapproved isn't required before you buy a car with an auto loan, and neither guarantee final approval. However, both can expedite the buying process. The loan prequalification process is simpler: You typically submit information like your income without documentation, and if there's a credit check, it's usually a soft inquiry that doesn't impact your credit score.
The preapproval process is more complex, requiring actual documentation to verify your income and other details so the lender can offer you conditional approval. You'll also agree to a credit check with a hard inquiry, which can temporarily ding your credit a small amount. Despite that, here's why it can be worth it to get preapproved:
- You receive a more accurate estimate of financing terms than with prequalification.
- It shows how much you can afford to borrow and on what payment terms, giving you a clear sense of which vehicles are within your budget.
- You appear as a more serious buyer to a dealer since your preapproval letter shows you're conditionally approved by a lender and for how much. Some lenders may even give you a check up to the preapproved amount, which you can use to negotiate with the dealer and pay with like a cash buyer.
- It makes the car-buying process faster since financing is already in motion.
- The interest rate on a preapproval is locked in.
- Getting preapproved with a bank or credit union in advance can usually leave you with a better interest rate than the dealer's financing options.
How Long Auto Loan Preapproval Is Good For
Preapprovals don't stay valid forever, but they do typically give you plenty of time to explore your options, comparison shop and make an informed decision. Most lenders allow preapproval letters and the loan terms within them to be valid for 30 to 60 days.
Learn more >> Prequalified vs. Preapproved: What's the Difference?
How Do Car Loan Preapprovals Impact Credit?
In the car loan preapproval process, the lender will run a hard credit check so they can thoroughly review your credit report. This helps them determine your ability to borrow and repay your debts.
This hard inquiry can have a negative impact on your credit score, but it's typically minor—likely just a dip of a few points. It should bounce back soon as long as you continue habits that help your credit.
Credit scoring companies understand that consumers might want to get preapproved for several loans in a short time in order to compare rates and terms. Because of this, most credit scoring models count hard inquiries for auto loan preapprovals that happen within a short window of time as a single inquiry (14 days for VantageScore® credit scores and 45 days for most newer FICO® Scores☉ ). If you plan to get preapproved with multiple lenders, make sure to do it within a short time period to minimize the negative impact to your credit.
Learn more >> How to Get Your Credit Ready to Buy a Car
How to Get Preapproved for an Auto Loan
Ready to get preapproved for a car loan and start shopping? Here are the recommended steps.
1. Determine Your Budget
When you apply for preapproval, you provide estimates of how much you need to finance, and possibly your preferred terms. Before you fall in love with a car or apply to get preapproved, crunch numbers so you have a realistic picture of how much you can afford on monthly car payments. Remember, auto loan payments don't just spread out the car's sticker price; they also charge interest, and the term length also plays a huge role in the monthly payment.
To get a better sense of what to put on your preapproval application, experiment with Experian's car payment calculator. Plug in different borrowed amounts, interest rates and repayment terms to see how those factors impact monthly payments and gain a clearer sense of what's doable for you.
2. Research Lenders
Shopping around and comparing rates and terms can help you find the best deal. Since the credit scoring models count auto loan applications within a short period as a single hard inquiry, it's smart to take advantage and apply for multiple preapprovals.
Consider researching a mix of credit unions, traditional banks and online-only lenders to see their offerings and weigh any restrictions or requirements that could impact your decision. For example, some lenders work with specific dealer networks and require you to use the loan with one of them, while others let you choose where to buy.
3. Apply for Preapproval
Now that you have a list of potential lenders, gather required documents, which typically include those that prove your income, employment and housing.
Here's where things can be tricky: Some lenders use the terms prequalified and preapproved interchangeably. Some might not explicitly offer preapproval, but instead use language directing you to apply for a loan (minus the "pre") and offering a term lock for a set time, such as 30 days. Remember, if they just want some basic details without documentation and don't run a hard credit check, this is a prequalification. Look for the more robust option, usually labeled preapproval or approval. Regardless of the label, don't panic—you are not obligated to accept the loan if you're approved.
4. Go Car Shopping
With your preapproval letter in hand (or check if your lender provided one in advance), it's car-buying time. Since preapproval offers typically last at least 30 days, take some time to shop around and compare different vehicles and prices at various dealerships.
Learn more >> What Car Should I Buy?
5. Finalize Your Auto Loan
Once you've chosen a car and agreed on a price with the dealer, it's time to move forward with the loan. Follow your lender's instructions to contact them and provide the purchase details. Depending on the way the lender does preapproval, you may need to submit additional or updated personal and financial documentation to finalize the loan. You might also be required to send copies of car insurance and the purchase agreement.
The lender will typically review your information, and if everything still looks good, you will receive final approval and a loan agreement with terms. Some details may be slightly different from your preapproval if your credit or financial situation has changed. If everything looks good, you'll sign the loan agreement. The lender might have given you a check to give to the dealer, or they might pay the lender directly on your behalf.
Learn more >> How to Buy a Car
The Bottom Line
If you're a few months out from buying a car and are unsure where your credit stands, now is the time to find out. It's ideal to check your credit three to six months before financing a large purchase. You can check your credit report for free with Experian, and if anything needs improvement, this buffer gives you several months to work to boost your credit score. Then, by the time you do apply for preapproval, your improved credit might land you a lower interest rate or better terms.