How and Why to Prequalify for an Auto Loan

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.

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.

2. Gather Financial Documents
   Next, gather the required documents. Some documents may include:
   
   
   • Proof of identity
   • Tax returns
   • Recent pay stubs
   • Mortgage statement
   
   
3. 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.
   
   
4. 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.
   
   
5. 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 (The chart below titled, "Prequalification vs. Preapproval," will need to be developed utilizing live text and colors within Amex brand guidelines. Once Dev is complete, please share with design for review.)

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

1. Get Prequalified
   First, get prequalified. This can help you to budget and narrow down your choices.
   
   
2. 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.
   
   
3. 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.
   
   
4. 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.
5. 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.
   
   
6. 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.
   
   
7. 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.