How to Get Preapproved for a Car Loan

Preapproval vs. Prequalification

Auto loan preapproval and prequalification may seem like the same thing, but they differ in a few key ways.

With prequalification, you're getting an estimate of how much you can borrow and what the loan terms, such as the interest rate, repayment term and monthly payment, might look like. Those terms are based on some basic information you provide and a soft credit check, which doesn't affect credit scores.

In contrast, a preapproval may require more information about your financial situation, including your income and current debt obligations. There's also typically a hard credit inquiry involved, which could have a small negative impact on your credit scores. As a result, it can provide conditional approval, as long as you and the vehicle meet final requirements set by the lender.

How to Get Preapproved for a Car Loan

Before applying for an auto loan, here are some steps you can take to get preapproved.

1. Check Your Credit

Because preapproval typically involves a hard credit inquiry, it's a good idea to assess your credit health before you apply. Get free access to your Experian credit report and FICO^® Score^☉, which can give you key details about where you stand and insights into how you can improve your credit if necessary.

There's no universal minimum credit score requirement to get approved for an auto loan. However, you'll typically have a better chance of securing a low interest rate with good credit or better.

2. Set a Budget

During the preapproval process, you'll typically get an estimated interest rate, repayment term and monthly payment. As a result, setting a budget beforehand can tell you whether or not you can afford the loan.

When deciding how much car you can afford, a good rule of thumb is to spend no more than 10% to 15% of your take-home pay on the monthly loan payment. If you don't already have one, create a budget to evaluate your income and expenses and to determine the right amount for your monthly payment.

Learn more: How Much Car Can I Afford?

3. Gather Information

Having the information you need for a preapproval application can help speed up the process. While the process can vary slightly from lender to lender, here are some general pieces of information you'll want to have on hand:

• Personal details: You'll need to share your full name, Social Security number, date of birth and contact details, such as a phone number and email address.
• Income details: You'll need to provide information about your employer and annual income.
• Housing information: This includes your address and how long you've lived there. You may also need to share whether you own or rent your home and what your monthly housing payment looks like.
• Desired loan details: Share how much you want to borrow and your desired loan term. To do this, you'll need to look at the sales price of the vehicle you want to buy, plus taxes and fees, minus your expected down payment.
• Trade-in information: If you're planning to trade in a car, include the title and loan information and other details.

4. Submit a Preapproval With a Few Lenders

It's a good idea to get preapproved with at least a few lenders. This process can take extra time, but it can provide invaluable information about available offers so you can choose the best one possible.

First, check with your current bank or credit union to see if it offers relationship perks to existing customers, such as interest rate discounts. If not, expand your search to other banks, credit unions and online lenders.

Learn more: The Best Way to Finance a Car

5. Compare Offers

Once you've gotten preapproved with a few lenders, compare those offers to determine which one is best for you. You may also decide to submit a credit application with the dealer, who can shop it around to more lenders, allowing you to compare even more offers.

In addition to the interest rate, pay special attention to repayment term options, prepayment penalties and other features that are important to you.

Benefits of Getting Preapproved for a Car Loan

There are several reasons to get preapproved for a car loan before you head to the dealership, including the following:

• Better negotiating power: With a preapproval, you get a set loan amount and interest rate. This can allow you to negotiate more effectively with the dealer, focusing on the car price rather than financing terms.
• More favorable loan terms: Getting preapproved with multiple lenders gives you a chance to compare interest rates and other terms to ensure you're getting the best deal possible.
• Avoid dealer markups and upsells: If you have a dealer arrange your financing, the interest rate you get may include a markup, increasing your total costs. What's more, because your preapproval amount is set, it can make it easier to say no to add-ons a dealer may try to pressure you to include.
• Gauge your expenses: Getting preapproved can give you more information about what the loan will cost, helping you determine if you can afford to buy a car.
• Quicker car-buying process: Since you've already secured conditional financing, you can typically get through the actual car-buying process at the dealership more quickly, reducing the time spent on paperwork and approvals.

How Long Is a Car Loan Preapproval Good For?

The process of getting preapproved for an auto loan typically only takes minutes, though it can take some lenders a few days to process your information and give you a decision.

Once you complete the process, your preapproval offer will be good for anywhere from 30 to 60 days, depending on the lender.

Frequently Asked Questions

The Bottom Line

Getting preapproved is a key step in the auto loan approval process, giving you important information you can use to evaluate the affordability of buying a car and to ensure you get the best deal.

Before, during and after the auto loan process, it's important to monitor your credit score to stay on top of your credit health. Experian's free credit monitoring service provides access to your FICO^® Score and Experian credit report, along with real-time alerts when changes are made to your report.