What Does It Mean to Be “Pre-Approved” for a Car Loan?
As you sift through your pile of junk mail, PennySaver coupons, and bills, you see the big notice: “Congrats, you’ve been pre-approved for a car loan!” But then you think, I never applied for a loan – how could I be approved for one? What does it mean to be pre-approved for a loan? Is a lender just going to send money to my checking account or do I have to do something first?
We’re here to help decode the auto finance lingo and answer your questions, including:
What does a car loan pre-approval mean?
Does a loan pre-approval guarantee I will get a car loan?
What does a car loan pre-qualification mean?
Why would I want a car loan pre-approval or pre-qualification?
What do I do after I get pre-approved or pre-qualified for a car loan?
What is Pre-Approval? And Does Pre-Approval Guarantee I Will Get a Car Loan?
If you have ever received a postcard in the mail or an email telling you that you’ve been pre-approved for a loan and wondered how they got your name and info, here’s the scoop: The credit bureaus (like Equifax, Experian, or TransUnion) sell lists of customers to companies for marketing purposes.
Companies that think you might be a good fit for their loan offers – including based on your location and credit score – will send you material advertising their “pre-approved” rates.
Here’s the important part: those pre-approval rates are not guaranteed. (The official term for a guaranteed rate is a “firm offer of credit”).
That means that you may still be denied for a loan or you may be approved at a higher rate than advertised. By buying credit info from the bureaus, the company sending you a pre-approval notice knows your approximate credit score, but they don’t know everything they need to know in order to underwrite your loan.
Typically, you will still need to apply so the company can get a better understanding of your overall credit history, your income, and the vehicle you’re interested in buying (or securing the loan you’re refinancing).
Keep in mind the “3 Cs” of credit:
Credit score
Collateral (that is, the car)
Capacity to pay (your income minus your debts)
Lenders use these “3 Cs” to determine whether to offer you a loan and what interest rate to charge you. Let’s say you have perfect credit, but a high percentage of your income is already committed to paying off other debts. Or you have great credit and low levels of debt, but the car you want to buy falls into one of the lender’s excluded lists (for example, many lenders say no to Suzukis and Hummers, no matter who is buying them). That’s why most lenders cannot offer you a firm offer of credit until they know exactly which car you want to buy and they’ve done a hard pull of your credit.
What is Pre-Qualification for a Car Loan?
How is getting pre-approved for a car loan different than getting pre-qualified? Pre-qualification is when you submit your own information to a company and they run a soft inquiry of your credit to learn more about your credit history. Because you provided the info and requested that the company find you a loan offer, you’re considered pre-qualified for a loan. Again, just like with getting pre-approved, your loan offer is not guaranteed. That only happens after the lender does a hard inquiry.
Why Would I Want to Be Pre-Approved or Pre-Qualified for an Auto Loan?
Getting pre-qualified (or having a lender pre-approve you) for an auto loan can help you to figure out how much car you can afford to buy without affecting your credit. The rates you’re offered are generally a good guide to help you begin your shopping process and identify the right lenders to work with when you are ready to buy your next car.
Why does having a soft inquiry instead of a hard inquiry matter? Hard inquiries are reported to the credit bureaus and can lower your credit score by a few points. Lenders look at applying for too much credit at one time as a warning signal – is this person about to borrow so much money that they won’t be able to repay it? Or even worse, is this person trying to defraud lenders by borrowing money they never intend to repay?
Don’t let fear of hard inquiries stop you from comparison shopping, though. If you apply with multiple lenders for an auto loan within a short period of time, it will only count once against your credit score. All of the different hard pulls will appear separately on your credit report, but they won’t reduce your score by more than the amount of one hard pull. That means there’s no reason not to compare your options.
Ultimately, in order to get a loan, you will almost certainly have to have at least one lender pull your credit, but it is better to keep all those hard pulls contained to a short timeframe. Different credit models use different rules; FICO gives you a rolling 45 days, but VantageScore only has a two week window. So if you’re just starting the car buying process and you know you’re not ready to buy, it makes sense to get pre-qualified to figure out what you can afford without worrying about it lowering your credit score.
What do I do after I get a car loan pre-qualification?
After you’ve received a pre-qualified offer, the next step is to find the car you want (and that you can afford!) and negotiate with a dealer to get the best price. We offer a ton of tips to help you navigate the car buying process. Make sure you check out our 7 Step Guide for Car Buying to help you find a car, get a loan, and make a smarter auto purchase. We also offer tools, including an email template, phone script, and negotiation tracker to make your car buying process go smoothly.
Bonus Question: What if I Don’t Want to Get Pre-Approved Offers?
Sometimes the junk mail stack just gets too high. If you’re sure you don’t want to receive pre-approved offers for car loans or other credit or insurance products, you can opt out at https://www.optoutprescreen.com/. You will be removed from the lists provided to lenders and other companies by Equifax, Experian, Innovis, and TransUnion.
Getting pre-approved or pre-qualified for a car loan is a great way to determine what loan rates you qualify for, without affecting your credit. It’s the best way to start your car shopping process.