How do I Get Pre-Approved for a Car Loan?
If you’ve read any of our other blog posts or looked through the resources on our website, you know we advise car buyers to get pre-approved or pre-qualified for a car loan before stepping foot in a car dealership. That’s because it’s the only way to compare your financing options without stress or artificial time pressure. But how do you go about getting pre-qualified for a car loan? What do you need to do? Where do you go? We’re here to help walk you through the process.
What Do I Need to Get Pre-Qualified for a Car Loan?
Step 1 in getting pre-qualified is to understand what “pre-qualified” means. If you’re not sure what the difference is between pre-approval, pre-qualification, and actual approval, we have a whole blog post explaining more. The short answer is that pre-approval or pre-qualification lets you know what loan rates you might qualify for without a hard pull (“hard inquiry”) of your credit, but neither provides a guaranteed rate. They should give you some guidance, though, as you car shop. The difference between pre-approval and pre-qualification is that you request to be pre-qualified when you apply to a lender (or a company like Outside Financial); pre-approval occurs when a lender contacts you with a loan offer proactively. If you get postcards in the mail claiming you could borrow money at xx%, it’s likely you’ve been pre-approved. Actual approval only happens after the lender has run a hard pull of your credit. For most (but not all) auto lenders, you’ll likely have to have picked out the specific car you want before you can receive a firm offer of credit (which just means the rate won’t change).
Step 2 is gathering all of your info in one place. Wherever you apply to get pre-qualified -- in person or online, with a credit union, bank, or any other financial services provider -- you’ll need the same basic info. You should have:
Your info, like name, address, date of birth, phone number, email address, and social security number. Lenders use those details to search for your credit record from the credit bureaus (Equifax, Experian, or TransUnion). The more detail you provide, the more likely they are to find a match. (Of course, they also need your contact info so they can let you know about your loan offers!). Some lenders may also ask for your driver’s license number.
As much detail as you can provide about the car you’re looking to buy, including the year, make, model, trim, any options, the VIN, and the approximate mileage if you’re buying a used car. If you’ve asked the dealership for a buyer’s purchase order (for a new car) or a bookout sheet (used car), it should have all of the required info. (Pro tip: you can use our tools to know exactly what to ask for and to keep your shopping process organized).
What if you’re still shopping and you haven’t found the right vehicle yet? Or you’re deciding among a few options? Most lenders will pre-qualify you for an “up to” amount; that is, the offer will be good for any vehicle up to a certain value, other than those the lender specifically excludes. For example, many lenders will not allow you to use your loan to buy a Hummer or Suzuki. The lender might also set a cap on the loan-to-value ratio, or LTV. If you see a phrase like “Purchase transactions limited to a maximum loan-to-value of 110% of MSRP or NADA retail value,” it means that the amount you borrow can’t be more than 1.1 times the value of the car, as determined by either the Manufacturer’s Suggested Retail Price or the retail value set by the National Automobile Dealers Association, which you can check on their website. So if you’re buying a car with an MSRP of $30,000, you won’t be able to borrow more than $33,000.
The name of your employer, how long you’ve worked there, and your income. Some lenders will ask for W2s or paystubs to verify. Lenders need to make sure that you’ll be able to pay them back, so they calculate the ratio between your new loan monthly payment and your income. If you make $2500 per month, a car loan payment of $1200 would eat up almost half of your budget, not giving you much wiggle room for rent, utilities, food, or clothing.
A few friends or family members who can act as references for you. Not all lenders ask for references, but it’s more common if you have less-than-perfect credit. The lender may or may not call your references before offering you a loan, but they will often keep their contact info in case they can’t find a way to contact you directly after they lend you money.
What Steps Do I Need to Take to Get Pre-Qualified for a Car Loan?
You’ve picked out the car you want, or at least narrowed it down to a few options. Now it’s time to apply. We recommend comparing loan offers from 3-5 banks or credit unions. If you like the place where you do your banking now, start there. Almost every financial institution’s website now lists their loan rates, and most allow you to apply online. If you have a lot of questions, or want a chance to explain your unique situation, it might be helpful to apply in person or over the phone, especially if you use a community bank or credit union.
Why is it so important to compare your options with multiple lenders? Because all financial institutions are not the same. You might get a 4% rate at one, a 14% rate at another, and get denied by a third. That’s because each financial institution sets its credit policies differently, and small variations in their models could make a big difference in the rates they’re willing to offer.
One common misconception car buyers have is that it will hurt their credit to apply for loans from more than one lender. If you’re only pre-qualifying for a loan, your credit score won’t be affected. Even if you’re applying for an approval -- which means the lender is running a hard pull of your credit -- multiple hard pulls for the same kind of loan will only count once against your score as long as they’re all done in a short period of time. (For example, VantageScore gives you two weeks). The lender you’re applying to should let you know whether they’re doing a hard or soft pull before you apply.
What Steps Do I Need to Take After I’ve Been Pre-Qualified?
Congrats! If you’ve been pre-qualified for a car loan, you’ve already taken a smart step toward getting the right car loan. Your next step is to figure out which loan is the best fit for you. Monthly payments are important, but they’re not the best way to compare loan options. Focus instead on the annual percentage rate, or APR. If you have to stretch out a car purchase over 7 years to make it affordable, it may not be worth it for you. The lower the APR, the better the loan, in general. You should also compare the overall financing package. If you want to buy a vehicle service contract, for instance, you may be able to get a much better deal through your credit union than you would through the dealership. If the amount you save is large enough, you might be better off with credit union financing even if the dealership offers a lower APR. (For more on our view of the ancillary products often sold with car loans, check out our page on protection products).
Once you’ve decided on your loan offer, check the instructions your lender gave you. Each lender handles the process a little differently. Most will provide you with a letter or something else you can take to the dealership when you buy your car.
Having a pre-approval letter means you can shop with confidence that you’ve secured a loan without dealership markups. To make sure your car purchase process is as smooth as your car loan process, we’ve compiled our tips for acing the purchase transaction.