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Is Auto Loan Pre-Approval a Good Idea When Buying a Car?

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In a Nutshell

Getting pre-approved for an auto loan is often a good idea. It will help you know how much money you can take out and what your monthly payments and interest rate will be. It also gives you power at the car dealership because it’s like being a cash buyer. When you get pre-approved, the lender will run a hard credit check, so only do this when you know you’re likely to qualify for the loan.

Written by Attorney Eric Hansen.  
Updated November 22, 2021


If you’re able to purchase a car without financing, that’s great. But if you’re like most car buyers, you’ll have to get financing. Shopping for financing is just as important as shopping for the actual car. When you buy a car, it’s usually a good idea to get pre-approved for an auto loan. It gives you negotiating power and takes haggling out of the equation. 

This article will discuss auto loan pre-approval and pre-qualification. We’ll look at the advantages of each and talk you through how to get pre-approved.

Pre-Approval vs. Pre-Qualification

When you’re shopping for a new car, it’s smart to review what’s best for your family and consider all the variables for your unique circumstances. You’ll want to consider the vehicle manufacturer, the make and model, and any available warranty. Of course, you’ll also want to look at the purchase price of the car and car loans if you’re planning on financing your auto purchase. Comparison shopping for financing is just as important as comparing different cars to make sure you buy the best car you can afford.

If you’re planning on financing your car purchase, it’s important to learn the auto loan pre-approval and pre-qualification processes. Getting pre-approved or pre-qualified can make your purchase smoother and less stressful. Both pre-approval and pre-qualification have their benefits. But they are not the same thing.

The Ins and Outs of Pre-Approval

Auto loan pre-approval is when a prospective auto lender does an in-depth evaluation of your credit report. The lender performs a hard credit check as part of the pre-approval process. Hard inquires can hurt your credit score, so you may see a dip in your credit score if you go through the pre-approval process.

If you end up applying for financing, the lender will also look at other financial information like your income and debt-to-income ratio. This helps the lender determine what loan amount you qualify for and what your annual percentage rate (APR) will be. Your interest rate will depend on your credit history and credit score. It will depend on whether you’re buying a new or used car, how long your loan is, and other factors.

The Ins and Outs of Pre-Qualification

Unlike a  pre-approval, a pre-qualification involves a soft credit pull, which doesn’t affect your credit score. The soft credit pull allows the prospective auto lender to look over your credit history and other financial information, so they can give you a sense of how much of a loan you’ll qualify for and what range you’ll be in for interest rates. Keep in mind, though, this is just a ballpark estimate, so it may be a wide range. 

Pre-approval will give you much more specific information about your loan terms, but getting pre-qualified can at least give you a sense of what your loan terms will be. Pre-qualification statements on the loan and interest rates are not financing offers. This means the loan amount and interest rates could change once the lender does a more complete financial evaluation, including a hard credit check, when you apply for financing.

A pro tip when you are considering pre-approval or pre-qualification: pull your credit report for free before you purchase a car so you can have a better sense of your credit history and potential financing terms. This way you’ll know whether you’re likely to get pre-qualified or pre-approved for auto financing.

Advantages of an Auto Loan Pre-Approval

There are some distinct advantages to auto loan pre-approval over pre-qualification. First, it will help you make an accurate car-buying budget. Pre-approval takes a lot of guesswork out of your car budget because it provides specific information about your car loan amount and interest rate, as well as what your monthly car payment will be. You’ll want to make sure your monthly payment is manageable for you. You can use an auto loan calculator to help see what your monthly payments will be and how much interest you’ll pay over time.

When you budget, get the numbers from a pre-approval and also remember to factor in a down payment or what the trade-in value of your old car will be. Also, don’t forget to include car insurance, maintenance, and gas when you determine the total monthly expenses of car ownership.

Pre-approval also gives you leverage and negotiating power. Getting pre-approved for a loan is as good as being a cash buyer. You’ll find that getting a good deal is easier when you’re pre-approved than when you’re uncertain about your financing. In this way, preapproval will also protect you from dealer financing and markups. The interest rate and fees for dealer financing are often higher than for pre-approved auto loans from third-party financial institutions. 

Dealership financing can be convenient, but you usually pay for it. With pre-approval, you can be certain you’re getting the best interest rate available, and you can gauge whether the dealership is giving you a good deal on financing. You can also negotiate with the dealer and see if they are willing to beat the pre-approved terms.

You’ll also avoid being upsold by the dealer. Dealers frequently suggest expensive add-ons at the last minute, and car buyers often agree just to keep things moving and get it over with. Getting pre-approved by a lender keeps a car dealer honest. You can stick with the pre-approved amount and not deal with any expensive add-ons. If there are special deals or incentives available, you may want to consider filling out the dealership’s loan application.

Advantages of Pre-Qualification

Getting prequalified for an auto loan can be useful in certain cases as well. Pre-qualification isn’t as in-depth as pre-approval is. It can be a good first step toward auto financing if you aren’t sure what terms and interest rates you’ll qualify for. Pre-qualification can help you gauge what kinds of terms you’ll qualify for without hurting your credit score from hard credit pull.

If you already have bad credit, it’s best not to ding on your credit score from a hard credit pull if you’re just going to get denied for financing. Seeking out auto loan pre-qualification rather than auto loan pre-approval may be best if you’ve had credit issues or are uncertain if lenders will approve your credit application. Pre-qualification gives you the opportunity to test the waters and see what’s out there without damaging your credit or worrying about being denied after you put work into the loan application or pre-approval process.

How to Get Pre-Approved

You can get an auto loan pre-approval from most financial institutions, like a local bank or credit union. A lot of people use online lenders as well. When the time comes, shop around and try to get pre-approved by two to three different lenders. This way you can compare the offers and select the best one.

You should only start getting pre-approved for car loans when you're ready to pull the trigger and actually buy a new vehicle or refinance. Remember that the pre-approval process involves a hard credit check, which usually decreases your credit score by a few points. To minimize this damage, get your pre-approvals around the same time — at least within a couple of weeks of each other. This way the credit bureaus will recognize that you’re loan shopping, so they’ll count all those hard credit pulls as one single hit.

Remember that the ding on your credit report from the hard credit check will be temporary. Your credit score might also decrease when you get the loan because you’ll have more debt. This is also temporary. As time passes, your credit score will improve, but you can also actively work to improve it in several ways, starting by making timely payments on your new loan and all your other debts.

Let’s Summarize…

Car shopping and auto financing can be quite stressful, but you can minimize that stress by utilizing auto loan pre-approval and/or pre-qualification, depending on your situation. If you know your credit score and credit history and are confident you’ll be approved for an auto loan, you can get pre-approved from several lenders as part of the comparison shopping process for your car loan. Do this once you’ve made a budget and are ready to buy. If you aren’t sure whether you’ll be approved or not, starting with pre-qualification is a good idea. You should also pull your credit history and credit score to get a better sense of where you stand.



Written By:

Attorney Eric Hansen

Eric D. Hansen is an experienced Minnesota attorney within a number of varying and nuanced practice areas. He has operated his own solo practice as well as worked at small suburban boutique firms and large diversified downtown law firms. Eric has a wealth of experience in busines... read more about Attorney Eric Hansen

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