How to get a preapproved car loan and accelerate your next vehicle purchase
Published 5:40 AM EDT, Thu March 21, 2024
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Dealership financing is undoubtedly easy, but exploring other options before you visit a car lot can pay off. The interest rates found at dealerships are typically higher than those offered by banks, credit unions and online lenders, according to the Consumer Financial Protection Bureau.
An auto loan preapproval can give you greater negotiating power and help you save money on interest. While preapproval isn’t a guarantee of financing, it’s a firm offer that indicates a lender is willing to approve your loan request, assuming your finances don’t change significantly before closing the loan. You can verify your eligibility and understand your potential rates by providing some basic information and agreeing to a hard credit inquiry.
We’ll walk you through the steps to get a preapproved car loan and explain how to improve your chances of getting the best rates.
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How to get preapproved for a car loan in 4 steps
1. Check your credit
In general, you’ll need good credit to qualify for a car loan at a competitive rate. Although some lenders offer bad-credit car loans, they have significantly higher annual percentage rates (APRs), increasing your cost of borrowing. In fact, the difference between APRs for good-credit borrowers versus bad-credit borrowers can be 10 percentage points or more. Here’s a look at average auto loan interest rates by credit score, according to Experian:
| FICO Score | Average new car rate | Average used car rate |
|---|---|---|
781 to 850 (super prime)
| 5.64%
| 7.66%
|
661 to 780 (prime)
| 7.01%
| 9.73%
|
601 to 660 (near prime)
| 9.60%
| 14.12%
|
501 to 600 (subprime)
| 12.28%
| 18.89%
|
300 to 500 (deep subprime)
| 14.78%
| 21.55%
|
Your bank or credit card issuer may offer free access to your credit scores, or you can pay a third-party service. If your scores are lower than expected or you want to look for ways to improve them, review your three credit reports for free via AnnualCreditReport.com.
2. Submit multiple preapproval applications
Interest rates, loan amounts, repayment options and eligibility requirements can vary significantly between lenders, so it’s wise to seek multiple quotes. Each application will require a hard credit inquiry, which can drop your credit scores by up to five points, according to FICO. But if you limit your inquiries to a 14-day rate-shopping window, the credit bureaus will bundle similar requests into a single credit pull, minimizing the impact on your scores.
Where to get a car loan preapproval
Start your search for the best auto loan rates with banks, credit unions and online lenders. Each type of institution has its advantages:
- Banks offer large loan amounts and robust customer service benefits. However, they tend to have stricter eligibility requirements and may require additional documentation.
- Credit unions are known for their low interest rates, particularly for borrowers without excellent credit — the National Credit Union Administration caps federal credit union rates at 18%. These nonprofit institutions also have more flexible qualification standards. You’ll need to become a member to get a loan, but membership may be as simple as making a small donation.
- Online lenders prioritize streamlined applications and speedy approvals. They may also be more likely to approve borrowers with bad credit. But if you want personalized service, a fully online process may feel impersonal.
- Dealer-arranged financing is unlikely to result in the lowest interest rate since they add a margin to boost their profits, but it doesn’t hurt to find out.
- Captive lenders are automakers’ financing arms, offering loans for the brand’s vehicles. If you’re buying a new car and have great credit, you may qualify for an automaker’s temporary 0% APR promotion or a cash rebate.
What you’ll need to get an auto loan preapproval
Generally, you’ll need to provide the following information:
- Government-issued form of ID
- Social Security number
- Proof of income, like pay stubs or tax returns
- Proof of residence, like a mortgage statement or rental agreement
- Vehicle information (if known), like the VIN, make and model, year and purchase price
3. Compare loan offers
With a stack of offers in hand, it’s time to determine which loan is best for your budget. Comparing APRs is a great place to start, but it won’t paint a complete picture. Use an auto loan calculator (like Calculator.net’s) to determine the monthly payment and overall cost of borrowing for each offer.
Example: Let’s say you’re looking for a $25,000 loan, and you’ve narrowed your search to three options.
| Loan 1 | Loan 2 | Loan 3 | |
|---|---|---|---|
APR
| 7.50%
| 8.25%
| 10.00%
|
Repayment term
| 5 years
| 4 years
| 7 years
|
Monthly payment
| $501
| $613
| $415
|
Overall cost
| $30,057
| $29,437
| $34,862
|
If you want to keep total borrowing costs to a minimum, Loan 2 has the lowest overall cost, and you’ll be debt-free sooner — but it comes with the highest monthly dues. If you need the lowest monthly payment possible and don’t mind making loan payments for seven years, you might choose Loan 3. Meanwhile, Loan 1 balances a reasonably low overall cost with a moderate monthly payment amount.
4. Ask the dealer to beat your best offer
Even if you’ve found an excellent preapproved offer, it doesn’t hurt to ask your auto dealer to beat it. If the dealer is incentivized to bargain — perhaps you’re making a large down payment or they’re trying to move cars off the lot — they may be willing to match or beat the offer to win your business. If the dealer can’t provide a better deal, you can drive away knowing you’ve found the best auto loan possible.
3 benefits of getting a preapproved auto loan
Getting preapproved for a car loan takes a little extra work, but it can be well worth the effort:
1. It helps you set a budget and stick to it
Getting preapproved gives you a transparent look at both your potential monthly payment and the total cost of borrowing. This may help you avoid buying a car you can’t afford by reducing the temptation to overspend at the dealership.
Plus, preapproval makes it easier to decline unnecessary add-ons since you have a firm spending limit in mind. During the negotiation process, the salesperson may try to tack on extras like extended warranties or protection packages, but having a preapproval can give you the confidence to pass on unwanted offers that will inflate your total cost beyond your budget.
2. It gives you negotiating power
Getting preapproved can also help when it’s time to negotiate the price of your car. From the dealer’s perspective, a preapproval indicates that you’re a serious buyer and ready to close the deal.
Plus, a car loan preapproval lets you act like a cash buyer. Salespeople often try to focus the conversation on monthly payments rather than overall cost to hide a long loan term and high overall cost of borrowing. With a preapproval offer in hand, you can instead negotiate the total out-the-door price — the cost of the car’s sale price plus tax, title and other fees. By centering the conversation on the price of the car itself, you’ll know whether you’re getting a good deal.
3. It helps you find the best deal
You’re likely to receive better interest rates by shopping around for a car loan than you would if financing through the dealership, sometimes one or two percentage points lower, according to a 2023 paper from the Massachusetts Institute of Technology. Because the dealer acts as a middleman between the lender and borrower, the rate they offer is inflated.
To see how shopping around and getting preapproved can help you save money, consider the following example: You’re eyeing a $26,000 used car, and a dealership offers you a 60-month repayment term and an 11.38% APR (the average used car rate in the second quarter of 2023, according to Experian).
But let’s say you shopped around and received loan offers from a local credit union and an online bank. See how their lower rates would affect the cost of your repayment:
| Example loan 1 (dealership) | Example loan 2 (bank) | Example loan 3 (credit union) | |
|---|---|---|---|
Rate
| 11.38%
| 7.76%
| 6.89%
|
Monthly payment
| $570.24
| $524.20
| $513.48
|
Overall cost
| $34,214.56
| $31,452.30
| $30,808.97
|
In this example, the dealership’s preapproved loan would cost several thousands of dollars more over the five-year repayment term.
Good to know: In some cases, the dealer may be able to offer the best loan for your needs. If you’re buying a new car and have excellent credit, for example, you may qualify for a promotional 0% APR on select makes and models. Asking the dealer to beat your preapproved offer can be a smart idea.
Auto loan preapproval vs. prequalification
Although some lenders use the terms preapproval or prequalification interchangeably, there are some notable differences.
| Preapproval | Prequalification |
|---|---|
|
|
An auto loan preapproval is more thorough and accurate than a prequalification. It involves verification of your financial information, and the lender will perform a hard credit check. If you’re preapproved for a car loan, you can expect to receive the offered rate and terms if you submit a formal application.
On the other hand, prequalification uses only self-reported information, and usually only requires a soft credit check. While a prequalification can be useful for confirming eligibility and getting a sneak peek at the rates you may be offered, it isn’t a firm offer from the lender and is likely to change.
However, not all lenders follow those definitions. For example, you may find credit unions or banks that advertise preapprovals with soft credit checks. Ask lenders about their qualification processes before moving forward.
How to improve your odds of getting preapproved
To maximize your chances of qualifying for a loan (and securing a low rate), follow these tips:
- Improve your credit scores. You typically need good to excellent credit to snag a lender’s best rate. To increase your scores, pay down your debt, limit new credit inquiries and make all payments on time.
- Apply with a cosigner or co-borrower. If your credit is less than perfect, applying with someone who has good credit and a reliable source of income can help you qualify for a loan. A cosigner or co-borrower may enable you to take out a larger loan or secure a better rate than you’d get as an independent applicant.
- Increase your down payment. The more invested you are in the vehicle, the less likely you are to default on the loan — or so the lender believes. A larger down payment will also decrease the amount you have to borrow, and less interest will accrue because of the smaller loan principal. Aim to put down 10% to 20% of the purchase price.
- Pay down other debt. When reviewing your application, lenders consider your debt-to-income ratio (DTI) — or the percentage of your pre-tax monthly income that goes toward debt — to determine whether you can afford the car loan payments. Paying down existing debt will improve your DTI and make you more attractive as a borrower. Lenders generally look for a DTI of 45% or lower, but keeping this figure below 36% is ideal.
- Shop around. You may qualify for a lower rate with one lender over another. If you select the first offer you receive, you might be leaving money on the table.
Frequently asked questions (FAQs)
Getting preapproved is fairly simple: If you have good credit and a steady job, you could fill out a simple form and be preapproved within minutes.
Having poor credit makes getting preapproved more challenging, but you can qualify for a loan if you have a cosigner or a larger down payment.
You can apply for preapproval for various car loan types, including loans to buy a new or used car, auto refinance loans or lease buyout loans. Getting preapproved can save you money and time at the dealership, regardless of the type of car loan you need.
Generally, you can find lower rates with banks, credit unions and online lenders than you can with dealer-arranged financing, saving you money on your car purchase. Plus, since the dealer handles all communication with their lending partners, you have no way of knowing whether they gave you the best loan offer you qualified for.
A preapproval offer includes information about how much you’re authorized to borrow and the cost of the loan. But remember: Just because a lender will give you a certain amount doesn’t mean you can realistically afford the loan. Before signing a loan agreement, ensure the payments fit comfortably into your budget. And don’t forget to account for car-related expenses like maintenance and insurance.
Typically, you need good-to-excellent credit to qualify for a car loan. The majority of used car loans go to borrowers with prime or super prime credit scores of 661 or higher, according to Experian.
However, some lenders specialize in loans for bad credit and many lenders allow borrowers to apply with a cosigner — someone with a strong credit history — to improve their odds of qualifying for a loan. Be wary of no-credit-check loans, which often come with predatory rates and terms and can sometimes be a scam.
In most cases, you can submit an online preapproval application and receive a loan decision within 30 minutes, though some lenders even offer instant preapprovals. Be sure to gather your supporting documents ahead of time to streamline the process.
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This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.
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