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Prequalification and preapproval are two different methods of getting an initial read on your auto financing options. Prequalification is less rigorous and only requires sharing basic information about your financial situation, and provides you an estimate of the rate and terms you might qualify for. Preapproval requires you to share more personal and financial information with a creditor, as it is essentially a partial application.
The difference between prequalification and preapproval
A preapproval is a formal offer from a lender, with conditions, and prequalification is an estimate of what car loan terms you might qualify for. Because a prequalification is not firm, it’s not much use when negotiating at a dealership.
But whether you opt for a car loan prequalification or preapproval, neither are guaranteed offers — final approval will depend on the lender’s underwriting department finding no surprises in your full credit history and additional factors, like employment and income verification.
Benefits of auto loan preapproval and prequalification
Both preapproval and prequalification allow you to get a good grasp on how much money you can feasibly borrow, and how much you will pay to borrow it.
Benefits of preapproval
With preapproval, you can shop with confidence, knowing that you will most likely get the same or very similar interest rate. You can also use your preapproval rate as a point of negotiation with the dealership once you enter the financing office, putting pressure on them to beat that rate.
Benefits of prequalification
Prequalification is a low-risk way to find out what kind of loan you could get, especially if you aren’t ready to start shopping in earnest. Your credit score isn’t impacted since the lender won’t run a hard credit check.
What to keep in mind with auto loan prequalification and preapproval
When you prequalify for an auto loan, you get a rough estimate of what loan amount and rate you will be offered. You can then use this information to shop around for the best deal, but be aware that prequalification is not an official offer.
Rates aren’t guaranteed — and their validity is dependent on how accurate the information you provide is.
Preapprovals also aren’t guaranteed. If your income, employment or credit drastically change between when you are preapproved and when you fully apply, you may be denied the loan. Keep this in mind while shopping, and be careful about your spending — especially with credit cards.
How to get preapproved for a car loan
If you decide that getting preapproved for a car loan is right for you, you will need to gather the necessary documents and submit a preapproval application. It is recommended that you research several reputable lenders before applying.
Once you have been preapproved, you will have a firm idea of how much you can spend and will be in control when it comes time to negotiate. Preapproved car loans are typically valid for 30 to 60 days.
If you are denied for preapproval, there are a few steps you can take. Check your application for mistakes, increase your down payment, reduce your overall debt or try a different lender. Before trying with a different lender, however, discuss the reason for the denial with the one you applied with.
Information you need to provide to prequalify or be preapproved
Preapproval and prequalification require some of the same information. Be prepared to provide:
- Personal information, such as your name, address and phone number.
- Financial information, including your income and housing payment.
- Information about the loan, including how much you want to borrow.
Preapproval will likely require you to submit more information, including your Social Security number and birthdate so the lender can pull your full credit report. This is known as a hard credit pull, and will temporarily lower your credit score by a few points.
The bottom line
Prequalification and preapproval are two useful tools when it comes to gauging how much you can spend on an auto loan. Preapproval can even help you get a better rate at the dealership if you’re considering financing through it. But the offers aren’t guaranteed, so spend wisely while you’re shopping.