How to Prequalify for an Auto Loan

If you’re looking for a car but find yourself without cash on hand to purchase one, you might consider an auto loan. An auto loan could help put a vehicle purchase within reach. If you’re thinking about taking out a loan, prequalifying could be a smart first step. By prequalifying, you’ll learn how much you may be eligible to borrow, making the car shopping experience less stressful and potentially more successful.

Let’s take a closer look at what it means to prequalify, why it’s worthwhile and how to do it.

What is prequalification?

Prequalification helps you determine if you may be eligible for an auto loan before you move forward with a car purchase.

Prequalification is usually a simple process that requires you to provide some basic financial and personal information, including an estimate of your income and debts.¹ The lender or dealer may collect these details online, over the phone or in person. Once you submit your information, the lender will likely perform a soft credit check, which won’t impact your credit score. Depending on the lender, you may be provided with an estimate that explains how much you may be able to borrow, the interest rate and the expected monthly payment amount. However, prequalifying does not guarantee you’ll be approved.²

By prequalifying, you’ll be able to consider your potential loan options before you submit a completed application. Be aware that applying for a loan triggers a hard credit inquiry, which causes a small, temporary dip in your credit score.

How is prequalification different from preapproval?

You might also come across the term “preapproval” — and while it sounds like prequalification, both serve different purposes in the car-buying process. Preapproval goes a step further than prequalification. It requires submitting financial documents and agreeing to a hard credit inquiry.

A hard credit inquiry could slightly lower your credit score for up to a year.³ If you plan to seek preapprovals from several different lenders, try to submit your applications within a short window of time — between 14-45 days — to minimize the impact of multiple hard credit checks on your credit score.⁴ Credit scoring agencies typically treat more than one auto loan inquiry made within that short timeframe as a single inquiry.⁵

Preapproval offers a stronger signal of loan approval and a more accurate picture of your borrowing power than prequalification does, but you’ll need to decide whether the cost to your credit score is worth it. If you don’t want to risk affecting your credit score, you can still get an idea of what your loan options might be by prequalifying instead.

Benefits of prequalifying for an auto loan

Prequalifying for an auto loan is typically a fast and hassle-free process — and it can be a helpful place to start before you begin browsing for cars. With a prequalification in hand, you can:

• Protect your credit score: Prequalifying lets you explore loan offers without affecting your credit score, so you can shop around.
• Narrow down your loan options: If you prequalify with multiple lenders, you can compare potential offers to find the one that’s most likely to work for you.
• Estimate your budget: In some cases, prequalifying for an auto loan may give you not just an idea of how much you may be able to borrow, but also what your monthly payments might look like.

How to prequalify for an auto loan

If you’re interested in prequalification, you can generally do so quickly online with a lender. But if you have some time, there are steps you can take beforehand to make the process go more smoothly.

1. Check your credit

First, check your credit score and credit report through free online monitoring tools and AnnualCreditReport.com. Your credit score plays a big role in how much money lenders are willing to let you borrow and at what interest rate. A higher credit score usually means a lower interest rate and more favorable terms. You can check your credit report for free online once a week. By reviewing your credit report ahead of time, you’ll get a better idea of where you stand and can catch any errors that might lower your credit score.

2. Gather your financial documents

Collect key financial documents like recent pay stubs and bank statements. Providing accurate information helps lenders better determine the terms they may be willing to offer you.

3. Research and choose a lender

Once your documents are ready, take some time to shop around for lenders that offer auto loan prequalification. Consider starting with any financial institutions you already have a relationship with, like your current bank or a lender you’ve worked with before. Then expand your search to include other lenders, credit unions, and banks to compare your options.

4. Submit a prequalification request

Complete the prequalification request. Depending on the lender, this can typically be completed online in only a few minutes.

5. Review and compare your prequalification offers

Lastly, review your prequalification offers carefully. Take a close look at the estimated loan amounts, interest rates and monthly payments you may get from each lender. Comparing these details side by side can help you find the option that best fits your budget and financial goals.

What to do after you prequalify

After you complete the prequalification process, you may choose the lender whose offer best meets your needs. At this point, you can start shopping for a vehicle within your prequalified loan amount. When you’ve found a car, you can submit a formal loan application with your chosen lender and undergo a hard credit check for loan approval.

Remember, getting prequalified with a specific lender doesn’t lock you into a loan. Ideally, you should choose the financing option that best aligns with your unique budget and goals.

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Steer your way to smarter borrowing

Prequalifying for an auto loan is a smart move that can set the tone for a smoother car-buying experience. It helps you shop with confidence, avoid unexpected financial surprises, and compare possible loan options that truly fit your needs. With a little planning upfront, you can save money, reduce stress and feel more in control every step of the way.

Sources

1,2 https://www.experian.com/blogs/ask-experian/how-to-get-preapproved-for-car-loan/
3 https://www.investopedia.com/soft-credit-check-vs-hard-credit-check-8725114
4 https://www.experian.com/blogs/ask-experian/multiple-inquiries-when-shopping-for-an-car-loan/
5 https://www.consumerfinance.gov/ask-cfpb/what-kind-of-credit-inquiry-has-no-effect-on-my-credit-score-en-321/