How and Why to Prequalify for an Auto Loan
8 Min Read | Published: May 29, 2024
This article contains general information and is not intended to provide information that is specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
Prequalification is an easy way to find out what type of car loans you may be able to get. It can be a low-risk way to get informed if you’re just shopping around.
At-A-Glance
- Prequalification is typically an estimate of what auto loan amounts, rates, and terms a lender may offer you.
- Preapproval, on the other hand, is typically a provisional offer from a lender with conditions that will need to be met.
- These terms are often used interchangeably and the definition of each will vary depending on the lender. However, both can help to streamline the car buying process.
Buying a vehicle can be a long process, from shopping around to closing on a car. Auto loan prequalification can be one way to help streamline your journey. Prequalifying for an auto loan can help to give you a good idea about the type of loans you may be eligible for and is an easy, low-risk option that can help you to plan and budget.
Note that the terms prequalified and preapproved are often used interchangeably. Additionally, different lenders may have different definitions for these terms. In this article, we’ll look at what these terms typically mean in a general sense, but keep in mind that this will vary, depending on the lender.
We’ll also explain how to prequalify for an auto loan and ways to get preapproved. See how prequalification and preapproval can help you secure the best financing for your vehicle purchase.
What Is Prequalification?
Prequalification is a pre-application step. Typically, with prequalification, the lender provides an estimated loan amount, rate, and terms based on a few pieces of your financial information.
Prequalification will typically only entail a soft credit check, not a hard credit check. The lender looks at a less detailed version of your credit report and score, so it does not impact your score like a hard credit check might.
A prequalification is not a guarantee, but it shows you may have a high chance of qualifying for loan amounts, rates, and terms close to what you prequalify for. It can be a useful tool for planning and budgeting.
How to Prequalify for an Auto Loan
While there are a number of different ways that you can go about getting prequalified for an auto loan, here are the typical steps that you will want to take:
- Check Your Credit
Start by checking your credit score and report. This will give you an idea of what you can qualify for before even applying, potentially saving you time when looking for prequalification.
It also gives you a chance to dispute any potential errors that could be holding your score down.
- Gather Financial Documents
Next, gather the required documents. Some documents may include:
- Proof of identity
- Tax returns
- Recent pay stubs
- Mortgage statement
- Research Lenders
With documents in hand, research lenders to find those offering auto loans and prequalification.
Explore banks, credit unions, and online lenders. Evaluate your current lending institution as well.
- Apply for Prequalification
Apply for prequalification at several lenders that offer it.
Lenders will typically have a short, online form to enter your basic personal and financial information. Each application should take no more than a few minutes.
- Compare Prequalification Offers
Evaluate your prequalification offers when approved. While they are not guarantees, they can help you determine your potential borrowing power and terms at each institution.
As a result, you can narrow down choices for seeking preapproval to save yourself time while getting the best terms.
Prequalification vs. Preapproval
While prequalification is a good preliminary step when shopping for a car, preapproval is typically the next step in the process. The terms presented in a preapproval offer may even be the actual terms you will receive.1 Preapproval may also require a hard credit check, which could impact your credit score.
Both may give you some level of negotiating power, but preapproval is typically much stronger. The rate and amount presented may be an offer rather than an estimate, so you may be able to use it to negotiate with a dealer.2
Depending on the seller, prequalification may not be as persuasive. However, you may be able to bring it up in conversation to indicate what kind of rates you may qualify for. It can also give you more general confidence when talking to the dealer since you’ll have a good idea of what you can qualify for.
Preapproval vs. Prequalification for Auto Loans
Typical Prequalification | Typical Preapproval | |
---|---|---|
Credit check | Soft credit check | Hard credit check |
What it tells you | Estimate of amounts, rate ranges, and terms | Actual rates and terms, subject to conditions |
Scrutiny level | Basic, self-reported | Thorough, information is checked and verified |
Negotiating power | Slight enhancement, but not much | Large boost, may incentivize dealer to try to beat or match preapproved rate |
Duration | Short-term | Longer-term |
Benefits of Prequalification and Preapproval
Benefits of Prequalification
- Streamlined Buying Process
Prequalification is quick and can help narrow your lender choices for later. - Clarity
You can go into the car buying process with a solid idea of what you could qualify for and afford. - Typically No Hard Credit Check
You can get several loan term estimates, typically with no hard credit checks.
Benefits of Preapproval
- Potentially Stronger Negotiating Power
Preapproval could be an incentive for dealers to beat or match the terms that you received. - You May Receive a Locked-In Offer
Some preapproval offers may also be the same as the final offer, subject to checks such as income, employment, and credit verification. Some offers may lock in your rate, guarding against rate increases.
How to Get Preapproved for an Auto Loan
- Get Prequalified
First, get prequalified. This can help you to budget and narrow down your choices.
- Review Your Credit Score and Report
Preapprovals may impact your credit, so you want to apply only for those you’re likely to qualify for. For this reason, it’s a good idea to review your credit score and report so that you have an idea about the type of credit that you may be eligible for.
- Calculate Your Budget
Calculate your monthly loan payment using your current income and expenses. Also, account for estimates of the new costs you’ll have after buying, such as registration, gas, maintenance, and insurance.
- Gather Necessary Documents
Preapproval requires more documentation than prequalification.
Here is some information you may need:
- Personal information
Provide your name, date of birth, Social Security number, and contact information. Lenders may ask for a copy of your identification to verify. - Residence information
Prove your residency with your address, whether you rent or own, how long you have lived there, and more. You may also need to provide statements for mortgage, rent, and utilities. - Income and Employment Information
Provide proof of gross annual income, such as pay stubs or tax returns, to help the lender determine the amount you can afford. Provide your employer’s name and contact details if asked. - Loan Information
Know how much you want to borrow and what term length you prefer. Longer terms may have lower monthly payments but could cost more in interest. - Car Information
Provide info about the car you’re potentially buying. That includes make, model, year, and mileage.
- Personal information
- Shop With Several Lenders
Look over several lenders, similar to the prequalification process. Ideally, you’ll have already prequalified with good lenders, so you’ll only need to compare these.
- Apply for Preapprovals
Normally, you incur a hard inquiry every time you apply for a loan. Auto loan preapprovals can be an exception.
Generally speaking, multiple preapproval applications for the same loan type over a short period of time, usually within 14-45 days of each other, count as one hard inquiry.3 This allows car buyers to compare rates and terms and bring more negotiating power to the table.
- Evaluate Your Offers
Review your preapproval offers and select the one that best fits your budget and needs.
Remember that the definition of preapproval may vary, depending on the lender, so be sure to read the offer terms and conditions carefully to familiarize yourself with the offers.
Frequently Asked Questions
Preapproval is not a guarantee, but it may be closer to a guarantee than prequalification. The lender’s underwriting department must verify information, including your credit, income, and employment, first. It’s also important to note that the definition of preapproval can vary, depending on the lender, so be sure to check the loan offer carefully to familiarize yourself with what it offers.
Shopping around with multiple lenders gives you the most room to compare and find the best rates.
Prequalification will not impact your credit score if the lenders only perform a soft credit check. Soft credit checks give lenders a less detailed view of your credit history and score, and do not impact your credit.
The Takeaway
Prequalification and preapproval can both help you when shopping for a new car. Just remember that the definition of these terms will vary, depending on the lender, so be sure to check carefully to clarify what is included in their offer.
1 “Auto financing: Prequalification vs. preapproval,” Bankrate
2 “Should You Get Preapproved for a Car Loan?,” Experian
3 “How will shopping for an auto loan affect my credit?,” Consumer Financial Protection Bureau
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