Sarah T.
While some people may be fortunate enough to pay the total cost of a car upfront with cash—they’ve either been saving their pennies, sold another car for cash, or did something to come up with the funds—most people need to take on some sort of financing option. And there are a lot of options out there to choose from.
You can either choose to find your own lender or work with your bank on options, or you can see what the dealer has to offer. Many dealers have preferred vendors for car loans and you might be able to take advantage of certain deals or promotions by going in that direction. But, one thing you might hear quite a bit when car shopping is this concept of secure car loan preapproval. And you might be wondering—just what does that mean?
In this article, we’ll help you learn about car loan preapprovals for auto loan refinancing or if you are purchasing your vehicle for the first time. Read on for more.
What is Car Loan Preapproval?
When shopping for your first home, you probably learned all about the need for working with a real estate agent and a mortgage agent that could provide you with a prequalification letter that shows the home seller that you can indeed get the funds needed to purchase the home.
But, you might be unclear about the differences between loan prequalification and preapproval and how they apply to car loans. While both prequalification and preapproval can give you an idea of how much you can borrow for a car loan, they are not the same.
Prequalification is generally a quicker process, often taking just a few minutes online or over the phone. Lenders perform a soft credit check—which doesn't impact your credit score—to give you an estimate of the loan amount you might qualify for based on the financial information you provide. However, it's important to note that prequalification is just an estimate and not a guarantee of loan approval or terms.
Preapproval, on the other hand, is more comprehensive. It typically requires a hard credit inquiry, which may affect your credit score slightly. During the preapproval process, lenders review your financial background more thoroughly, examining your credit report, income, and other debts. As a result, the preapproval letter includes the loan amount you are approved for, along with the interest rate and loan terms. This makes preapproval a stronger indicator of your ability to secure financing and gives you a clearer picture of what you can afford.
Here’s how the car loan preapproval process typically works:
Find Lenders That Offer Auto Loans
Start by researching various lenders that provide financing for car purchases. This could be banks, credit unions, or online lenders. Each will have different terms and interest rates, so it’s important to compare them to find the best option for your situation.
Explore Different Interest Rates and Payback Periods
Once you have a list of potential lenders, examine their loan terms. Look at the interest rates they offer and the length of the loan period. Finding a balance between a manageable monthly payment and the total cost over the life of the loan is key.
Submit Preliminary Information
Lenders usually require you to provide some preliminary information to start the pre-approval process. This might include details about your employment, income, and existing debts. They will use this information to assess your creditworthiness and financial stability.
Receive Preapproval Details
If you qualify, the lender will give you a pre-approval letter (or email) stating the maximum loan amount you are eligible for, along with the terms and interest rate. Remember, just because you are preapproved for a certain amount doesn’t mean you need to spend that much. Budgeting wisely and choosing a car that fits comfortably within your financial means is a must.
What Will I Need for Preapproval of Auto Loans?
To get your preapproval, you will need to be prepared with some key information. Though different lenders may ask for more or less than others, having the following ready to go can speed up the process of securing auto loan preapproval.
Credit Check/Evidence of Credit History
To secure preapproval for an auto loan, lenders will perform a credit check to assess your creditworthiness. You'll need to provide authorization for this check. Know your social security number and check your credit history in advance to ensure there are no surprises. You can get a free copy of your credit report once per year from Annual Credit Report.
It's helpful to have a credit history record available, including any credit reports and scores you can access. This information helps lenders determine the interest rates they will offer you based on your financial reliability.
Bank Account Information
Lenders will require details of your bank account, including recent statements, to verify your financial stability and cash flow. This is one of the biggest car loan preapproval requirements and includes checking and savings accounts and any investment accounts you might have. Comprehensive bank account information ensures lenders can accurately assess your loan repayment ability.
Potential Collateral or Assets
While auto loans are typically secured against the vehicle itself, additional collateral might be necessary depending on your credit situation. Be prepared to disclose information about any assets you own that could serve as potential collateral. This might include real estate, other vehicles, or valuable personal property that can reassure lenders of your loan repayment.
Expected Loan Amount
While this is not an issue when you work through a dealer’s financing vendors, if you work with an external lender, be sure to have a clear idea of how much money you need to borrow. This involves analyzing the car price you intend to purchase minus any down payment you plan to make. Being precise with your expected loan amount helps streamline the preapproval process and ensures the loan offer aligns with your purchasing needs.
RateWorks Makes the Car Loan Preapproval Process Easy
Refinancing is the way to go if you have a car but want to seek a lower interest rate or get those monthly payments down. At RateWorks, we make the car loan preapproval process easy. To get started, get your refinance quote and see how much you can save.
