Before you set off on a car hunt, it’s a good idea to know how much you’ll be able to spend. But how do you know that? By going through the preapproval process of a car loan.
This guide will explain what exactly a car loan preapproval is and how it works.
Let’s get started!
What Is a Car Loan Preapproval?
To be preapproved for a car loan means that the lender is willing to give you a car loan up to a specific price before you purchase the car. That’s not to say that you will have cash on your hand when shopping for a car. It simply means that you know the amount of the car loan you’ll be getting once you find a good car deal.
Having a preapproval car loan not only gives you a better idea of how much you can spend but also helps you to find a good deal on a loan. How? You can apply for several preapproval loans simultaneously, and once you find a great car, choose the loan that best fits your situation.
When going through the preapproval process, the lender will tell you how much money you will get, and you can search for a car within that price range. Once you have chosen your vehicle, you then must go through an additional check-up of the loan requirements.
If nothing has changed between the time of the preapproval and the purchase of the car, you then have been officially permitted to use the car loan.
Check out our comprehensive reviews of the best auto loans in Canada!
How Does a Car Loan Preapproval Work?
A car finance preapproval works pretty much like any other type of loan preapproval. If you’ve been through a mortgage preapproval, then you already know the procedure.
First things first, you need to qualify for preapproval. That means that lenders will want to check your credit score and your monthly income to see if you have any outstanding debts. If you fulfill the preapproval qualification criteria, the lender will tell you the maximum loan amount, interest rates, and loan terms.
The loan terms can be broken down into either bi-weekly or monthly payments. The loan length will depend on the lender. The lender should provide you with information on this matter. But if not, you can use the online car loan calculator to get a rough estimate.
Regardless of your credit score, you should try and apply for a vehicle loan preapproval so you win the best deal on a car.
What Do You Need for a Car Loan Preapproval?
Just like when applying for a personal loan, mortgage or any other type of loan, the borrower must fill out an application and agree to a credit score check.
Here’s what you need when applying for a preapproval car loan:
Know your credit history
Before even starting with the application process, the most important thing to do is to check your credit score so you’ll know if it’s too low and start working on improving it. As with any other loan application, lenders will pull a credit check to see if your creditworthiness matches their car loan requirements.
Because it would be crushing to apply for a preapproval car loan just to find out later that you have been rejected. You also have the option to check your credit at one of the credit bureaus, such as Equifax, Experian or Transunion.
You must provide your full name, date of birth, valid home address, and email address, as well as your social security number. The information about your home address should also entail:
- Whether you live in a rented apartment and, if so, what’s your monthly housing payment;
- Whether you live on your own or with someone;
- For how long you have been living there; and
- Whether you have a mortgage and, if so, provide them with a mortgage statement.
Lenders will also ask for your driver’s license to confirm your identity.
Lenders will want to check your monthly income and you will be required to provide them with proof. Furthermore, they will want to see your gross annual income and your employer’s name (if applicable). They will also ask you to show your bank statements. Ensure that, when providing proof of income, you have at least three consecutive months of monthly income.
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Will a Car Loan Preapproval Affect Your Credit Score?
When you apply for a car finance preapproval, you must submit an application. As it is with most types of loans for Canadians, lenders will perform a credit check to assure that you’re not a risky borrower. It’s an essential element of the credit application which tracks your credit history to help lenders decide if you’re eligible for the loan.
Whether your credit score will be affected or not, and to what degree, largely depends if the lender will pull a soft or hard credit check.
Do Car Loan Preapprovals Affect Your Credit Score?
This is how your credit score is affected depending on whether it’s a soft pull or hard pull.
In the case of a preapproval car loan, lenders perform what’s known as a soft credit inquiry. It means that the lender will want to check your credit score, but because you have not been approved yet, it means you’re not yet tied to a new application for a loan.
Therefore, a soft pull doesn’t pose a great risk to your credit score. A soft pull will be shown on your credit report but will not lower your credit score whatsoever.
Hard inquiries impact your credit score. Because a hard pull represents a track history of your credit, several hard pulls may significantly affect your credit score. This can lead to a possible lowering of your borrowing power in the future.
The good news is that if you apply for a preapproval car loan at several different lenders within 14 days, there is a good reason for that.
To put it simply, several hard pulls will lower your credit scores because credit bureaus consider them to be different hard inquiries. But if you submit multiple credit applications within 14 days, the credit bureau will consider it to be a singular hard inquiry. In return, it will lower the impact on your credit score.
Where Can You Get Preapproved?
Applying for a vehicle loan preapproval comes with great flexibility because there are several options for where you can apply. This allows borrowers to choose the most convenient prospect for them, depending on their situation.
We have outlined the following available options you can choose to apply at for an auto loan preapproval.
There is always the option to apply at a traditional bank for a preapproval on a car loan. While most banks require a physical presence to fill out a credit application, some may offer online applications.
When you’re filling out the credit application at the bank, besides your credit score, the bank will also want to check your debt-to-income ratio. If they determine that you have a good DTI ratio and solid credit, the bank will issue a preapproval letter.
The process is the same when applying at a credit union as it is at banks. You can also choose to do it online or directly at the credit union bank.
But bare in mind that if you have a bad credit score, many banks or credit unions might not want to offer you a loan.
Many online lenders offer a variety of loans, while some may offer only car loans. Regardless, it’s a very convenient option for those unable to search in person.
Similarly, as with applying at a bank or credit union, you need to fill out a credit application for preapproval. The remaining procedure is as per usual. The advantage of an online application is that is a straightforward process that takes you only 15 minutes of your time.
Another benefit of online lenders is that they offer much lower interest rates and fees. Additionally, many of them offer car loans for borrowers with bad credit scores.
Lastly, you can always apply for a preapproval on a car loan at the dealership. The benefit of applying at a vehicle retailer is that car dealers cooperate with different lenders, thus you can get different lending options. Plus, if you’re looking for a brand new car, the car dealer will know exactly which autos fit your preapproval budget.
Some vehicle retailers even offer the option of an online application, so you don’t need to go to an actual car salon to fill out the application.
How Long Does an Auto Loan Preapproval Take?
The preapproval period will highly depend on where you apply for a car finance preapproval. That will determine how long it will take you to finish the preapproval application process.
If you are applying online for an auto loan preapproval, it can take you from several minutes to 15 minutes max. It’s a seamless process and saves you a lot of your time.
If you’re applying at a bank, credit union, or car dealership, it typically takes up to one business day. However, it also depends on the day of the week you’re filling out the application. If it’s Friday, for instance, it will take until Monday to hear from the lender.
It may also happen the lender comes back to you for additional information, which, in turn, will prolong the processing of the application. But again, expect one business day on average to find out if you have been approved or not.
If you go through an online lender, applying will take you only a few minutes, and you will learn about the preapproval decision right away.
Why Should You Get Preapproved for a Car Loan?
There are many advantages to getting preapproved for a car loan. Not getting preapproval will make the purchase process much more difficult for you. This is why you should seriously consider getting a preapproval on a car loan.
Setting a realistic budget
Once you’ve been preapproved, your budget will be clear. You will know exactly how much you have been preapproved for, and you’ll be able to shop for a car within that price range. Furthermore, you will understand your interest rates, so you can plan out a monthly budget for loan repayments.
However, when learning about the loan amount you’re able to use, you must take into account the expenses for taxes and fees Also, you must think about car insurance and gas. It all adds up to the expenses you need to set apart from your loan.
Protection against financing markups
Having an auto loan preapproval means that you will get knowledge of your interest rates beforehand. Which, in turn, protects you against any add-ups to your monthly payments.
If you’re applying for a car loan at a dealership, lenders may add a certain percentage to your interest rates that you may not be aware of. But when you have a preapproval car loan, you know in advance exactly how much you will need to pay. Preapproval also can get you the best interest rates which puts you in an advantageous position.
Dealerships may have much lower interest rates than a bank since car dealers have better access to cheaper financing.
Get a better negotiating position
When you already know how much you can spend on a car and what your interest rates will be, It puts you at an advantage when negotiating the final price of a car. It spares you from playing any games with the car dealer, and it allows you to focus on the out-the-door price instead.
Also, if you’ve got an old car you want to trade in, online shopping can get it valued accordingly, which only adds to your stronger position in the bargaining.
Get a better rate
Having a preapproval car loan will get you better interest rates, as already explained earlier in this article.
Moreover, when applying to multiple lenders, you can compare the interest rates and decide which one is best fitting your monthly budget.
Now, after you have learned the most essential information about preapproval car loans, consider applying for one if you have decided that you need a new or better car.
Having a car finance preapproval puts you in a greater negotiating position and helps you to seal the best deal on a car.
Preapproval means that you can apply for a loan before buying a car, so you can know how much you have in hand when purchasing it. There are certain conditions you must fulfill, such as having no changes in status from the time of your preapproval to the time of your purchase.
Having a car loan preapproval is not a 100% guarantee that you’ll get the loan. Although the probability of that happening is quite low, one should be aware of that possibility. Notice how the prefix used here is pre, which essentially means that it has not been approved yet, but you’re in the process of getting the loan.