Buying a car can be both exciting and stressful, especially if it’s your first time. However, doing some initial research and developing a solid plan beforehand can make the experience more seamless so you can focus on the exciting part. One of the most important decisions you will make is how you’re going to pay for the car, which often involves applying for a car loan.
It can be helpful to apply for pre-approval of a car loan with a trusted lender to give you a better idea of what your budget should be. Does pre-approval mean you will get the car loan? Not necessarily. Pre-approval indicates a lender’s initial willingness to provide financing up to a certain level but does not guarantee final loan approval. Several other considerations can impact the loan process after pre-approval, such as credit checks, income verification, and vehicle selection.
However, it’s worth going through the process because a pre-approved loan offer can help you set a realistic budget for your purchase. It will also strengthen your position when negotiating with car dealerships (i.e.,you’ll be able to show the dealer your spending power) and can sometimes also streamline the purchasing process since you have already begun lining up financing.
The following guide outlines the pre-approval process as well as what factors might affect whether or not you get final loan approval.
How Does Pre-Approval for a Car Loan Work?
The first step in the pre-approval process is to submit an application to a qualified lender, usually a bank, credit union, or online lender. It might even be a good idea to apply to several different lenders so that you can compare their interest rates, terms, and other conditions.
Just note that if you do decide to apply with more than one lender, you should submit all the applications within the same 14-day timeframe so that the multiple hard credit inquiries only count as one inquiry and have minimal impact on your credit score.
With your application, you will provide the lender with some of your financial details, such as your income, employment status, and a list of any other outstanding debt you have. The lender will run a preliminary credit check, including looking at your credit history and credit score, to help them evaluate how much risk they run in lending money to you.
Following the review, the lender will provide you with a pre-approval loan amount, which is the maximum amount you could potentially borrow from them. Many lenders will also include estimated interest rates, monthly payment amounts, and term options.
Remember, these numbers are not guaranteed. Pre-approval does not mean you will get the car loan, but rather, being pre-approved shows that you meet certain criteria based on the information you provided at the time of the preliminary assessment. Further verification will happen later.
Factors That Might Impact Your Car Loan
Once you’ve decided to move forward with buying a specific car, your preferred lender will conduct a more in-depth assessment of your creditworthiness and finances before giving final approval (or denial) of your loan application. Lenders might also adjust interest rates, loan amounts, or repayment terms based on this updated assessment. The following factors might impact the final loan:
Credit Check
After pre-approval, the lender will conduct a more complete and thorough credit check. Throughout the financing process, it’s a good idea to keep a close eye on your credit score and review your credit report to make sure it’s an accurate representation of your financial situation.
If your credit score changes significantly (either positively or negatively) between the time you were pre-approved and the final credit check, your lender might adjust the interest rate or terms of your loan or even deny your loan, accordingly.
Vehicle Selection
Lenders sometimes offer different interest rates for new vehicles versus used vehicles, or they might have specific criteria related to the age, mileage, or overall value of a car or truck. Be sure to select a vehicle that meets the given criteria; otherwise, your loan application may be denied.
Income Verification
Using various forms of documentation (e.g., pay stubs, bank statements, tax returns, etc.) your chosen lender will verify your income. If you are unable to provide appropriate proof of income, or you experience significant changes to your income such as losing a job, the lender might adjust the terms or withdraw approval of your loan.
Debt-to-Income Ratio
Comparing your monthly debt payments to your monthly income gives your lender a debt-to-income ratio (DTI). Significant changes to either your debts or your income can alter the ratio and affect your eligibility for a loan. It is in your best interests to avoid taking on additional debt before receiving final approval for your car loan.
How to Take Advantage of Your Pre-Approval for a Car Loan
We started with the question, “Does pre-approval mean you will get the car loan?” and learned that the answer is not necessarily. However, you can take advantage of your pre-approval for a car loan as a helpful tool to set your budget before going car shopping. Just remember to take into account the total costs associated with buying a vehicle, including taxes, registration, insurance, maintenance, gas, fees, and interest rates.
Being pre-approved for a car loan can also help you negotiate with the car dealership. Your pre-approval shows that you have done research, are prepared, and are serious about buying a vehicle, which can sometimes lead to better terms or discounts. Since you won’t have to rely on the dealership’s financing options, you will have more freedom to negotiate for benefits like extended warranties, upgrades, optional features, or accessories.
Finally, starting the financing application process early can smooth out the car-buying process and get you in your vehicle sooner since the paperwork has already been started with your lender.
So, if you’re ready to buy a new or used vehicle, don’t forget to do some research first, find a reputable lender, and apply for a pre-approved car loan before you head to the dealership.