Pre-qualifying for an auto loan isn't like getting a pre-approval. Both can be a big help upfront, though getting pre-approval with damaged credit may be more difficult than you anticipate.
Pre-approval gives you a direct loan from a bank, credit union, or online lender that you can take to the dealership to purchase your car, and it's typically reserved for those with good credit.
Pre-qualification, on the other hand, is a way to select a dealership that has the lending resources you need as a bad credit borrower. Pre-qualification can help you avoid wasting time and money applying to lenders that won't help you due to your credit score.
What Does It Mean to Pre-Qualify for an Auto Loan?
When you prequalify for a car loan, it signals to a dealership that you're serious about getting a vehicle. When you're pre-qualified for an auto loan, you're matched with a dealership based on specific requirements.
Not all dealers and lenders can work with borrowers who have less-than-perfect credit, and using a pre-qualification can cut down your time searching for the right lender and having your credit score hit over and over again.
Pre-Qualification vs. Pre-Approval
A pre-qualification begins with a request for financing that saves dealerships and lenders time by getting the process started up front. When you're struggling with poor credit, it's important that you take care not to have your credit score pulled multiple times, especially if those inquiries are stretched over weeks or months. Each hard inquiry generally dings your credit score around five to 15 points.
If you're pre-qualified, you're matched to a dealer based on the information you give. Getting matched with the right dealership that's signed up with the right lenders makes a world of difference when you're seeking a car loan approval.
Pre-approval, on the other hand, actually gives you a loan from a direct lender such as a bank, credit union, or online lender. This essentially turns you into a cash buyer.
When you visit the lender, you're approved for a certain amount of money, which is given to you in the form of a check or sent directly to the dealer when you complete your purchase.
These loans are typically given to people with good credit, but once you're pre-approved, you can go to the dealership of your choice and shop like any other traditional buyer. If you're able to get pre-approved, you can also use it to negotiate a lower rate or a better deal on a car loan through a dealer's captive lenders. The lenders the dealership is signed up with may offer you a lower interest rate if you choose to finance with them instead.
But getting pre-approved for a direct loan isn’t for everyone. If you have bad credit, it might not be possible to get pre-approved with a direct lender, as they tend to have higher credit score requirements. However, you may still be able to get pre-qualified with a dealer that has lending resources to work with people in unique credit situations.
Benefits of Pre-Approval
If you qualify, pre-approval is a great tool to use when you're buying a vehicle. This essentially turns you into a cash buyer and allows you to go to the dealership and pick out any vehicle within the price range of your loan.
Why Get Pre-Approved? When you are struggling with credit issues, pre-approval allows you to shop like a cash buyer, choosing any vehicle that fits within the budget you have. You'll know how much you can spend and how much your interest rate will be upfront. This also helps give you a bargaining chip with the manufacturer's captive lender, allowing you to get lower rates from the dealership's lender in some cases.
How Pre-Approval Affects Your Buying Power: Pre-approval affects your buying power by giving you leverage at the dealership. When you come in with a loan, you get treated like a cash buyer, which means you can negotiate lower prices and rates with confidence, since you know how much you have to spend. Additionally, you're less likely to be pressured into last-minute financing decisions by a dealer, and likely to close the deal on your car purchase faster than someone who is still shopping for a loan.
The Role of Interest Rates in Car Financing: Auto loans are simple interest loans. This means that the higher your interest rate is, the more it costs you to borrow money, and the more of your loan repayment will go to interest. This lowers the price range of the vehicles you can shop for. Additionally, when you get pre-approval from multiple lenders, you can rate-shop to select the lowest interest rate you can qualify for.
How to Pre-Qualify?
Pre-qualification for an auto loan isn't like pre-approval. With pre-qualification, you're not getting a loan, only the right direction to go in. This is because your information is pre-screened, and then sent to a dealership that has the right lending partner to work with your credit situation. Pre-qualification is typically used by bad-credit borrowers to help them avoid wasted time and money applying over and over again just to get denied an auto loan.
Steps for Pre-Qualifying for an Auto Loan
To pre-qualify for a car loan, your best bet is to use a service like ours. At Auto Credit Express, we have an extensive partner network throughout the United States that works with borrowers with less-than-perfect credit. When you find a service you want to use to help guide you to an auto loan with multiple hits to your credit is fill out the online request form.
What You Need to Qualify for an Auto Loan
When it comes to qualifying for an auto loan, there are different requirements depending on your credit score and your lender. If you have good credit, qualifying for a car loan may be as simple as visiting a dealership and presenting a down payment.
With poor credit, though, the process is a little different. Rather than picking out a car and getting the financing you need, bad credit borrowers must first get approved for a loan with a subprime lender.
Once approved, the lender will let the dealership know what loan amount and interest rate you qualify for, and show you vehicles within that price range.
To qualify, you will have to meet many requirements, such as meeting income and employment requirements, meeting minimum down payment requirements, providing proof of residence, and proof of a working phone, along with a list of references.
Common Mistakes to Avoid?
When you're looking for pre-approval on a car loan, there are some common mistakes to avoid. Avoid doing the following, and you should have an easier time getting pre-approved or pre-qualified for a loan.
Not knowing your credit score. Going into a car loan situation blind is the first thing you want to avoid. If you don't know your credit score, you can't negotiate with the lender, since you won't know what the average interest rate for someone in your credit range is.
Not knowing your budget. Even if you get approved for a high loan amount doesn't mean it's in your budget. There are several calculations that a lender does that you can do on your own. Make sure to calculate your DTI, PTI, and LTV before you dive into an auto loan.
Not Rate Shopping. By only applying for pre-approval with one lender, you don't have the chance to compare rates and get the loan that best fits your budget. Rate-shopping means applying for multiple loans of the same kind within a short period, typically two weeks. This also minimizes the hits to your credit.
After Pre-Qualification: What’s Next?
If you're pre-qualifying, you're getting connected to the dealership that has the lenders to help with unique credit situations. Once you get a pre-qualification, you can visit that dealership to see what your rates and terms are with their lenders.
How to Use Your Pre-Qualification to Shop for Cars
To use your pre-qualification to shop for cars, you have to look at the specific dealership that you were matched with. This is the dealership that has acknowledged you meet their minimum lending requirements and that they have lenders available to help you.
Closing the Deal: Finalizing Your Auto Loan
Once you get to the dealership, you will be asked to fill out a loan application, which will then be submitted to the dealership lenders. They will give the dealer what is known as a payment call, where they tell the dealer how much you're approved for and at what rate and term. Then, you can choose a vehicle from the lot that fits within those guidelines.
