What Is Prequalification?
Prequalification is a pre-application step. Typically, with prequalification, the lender provides an estimated loan amount, rate, and terms based on a few pieces of your financial information.
Prequalification will typically only entail a soft credit check, not a hard credit check. The lender looks at a less detailed version of your credit report and score, so it does not impact your score like a hard credit check might.
A prequalification is not a guarantee, but it shows you may have a high chance of qualifying for loan amounts, rates, and terms close to what you prequalify for. It can be a useful tool for planning and budgeting.
2. How to Prequalify for an Auto Loan
While there are a number of different ways that you can go about getting prequalified for an auto loan, here are the typical steps that you will want to take:
Check Your Credit
Start by checking your credit score and report. This will give you an idea of what you can qualify for before even applying, potentially saving you time when looking for prequalification.
It also gives you a chance to dispute any potential errors that could be holding your score down.
Gather Financial Documents
Next, gather the required documents. Some documents may include:
- Proof of identity
- Tax returns
- Recent pay stubs
- Mortgage statement
Research Lenders
With documents in hand, research lenders to find those offering auto loans and prequalification.
Explore banks, credit unions, and online lenders. Evaluate your current lending institution as well.
Apply for Prequalification
Apply for prequalification at several lenders that offer it.
Lenders will typically have a short, online form to enter your basic personal and financial information. Each application should take no more than a few minutes.
Compare Prequalification Offers
Evaluate your prequalification offers when approved. While they are not guarantees, they can help you determine your potential borrowing power and terms at each institution.
As a result, you can narrow down choices for seeking preapproval to save yourself time while getting the best terms.
What is prequalification for an auto loan?
So, what does getting prequalified for a car loan mean, anyway? It’s a way to get an idea of what your loan may look like. Lenders provide an estimate of what they may be willing to loan you and what that loan might look like, based on some basic information on your financial profile. Worth noting, prequalification doesn’t mean your loan has been approved– you’ll still have to formally apply for it with your lender. It should, however, provide some clarity on what you may be approved for.
The difference between prequalification and preapproval
A preapproval is a formal offer from a lender with conditions. Prequalification is an estimate of what Car Loan terms you might qualify for. Because a prequalification is not firm, it’s not much use when negotiating at a dealership.
But whether you opt for a car loan prequalification or preapproval, neither are guaranteed offers– final approval will depend on the lender’s underwriting department finding no surprises in your full credit history and additional factors, like employment and income verification.
Benefits of auto loan preapproval and prequalification
Both preapproval and prequalification allow you to get a good grasp on how much money you can feasibly borrow, and how much you will pay to borrow it.
Benefits of pre approval
With Pre Approval, you can shop with confidence, knowing that you will most likely get the same or very similar interest rate. You can also use your pre approval rate as a point of negotiation with the dealership once you enter the financing office, putting pressure on them to beat that rate.
Benefits of prequalification
Prequalification is a low-risk way to find out what kind of loan you could get, especially if you aren’t ready to start shopping in earnest. Your credit score isn’t impacted since the lender won’t run a hard credit check.
What Does It Mean to Pre-Qualify for an Auto Loan?
Auto loan pre-qualification is a process that may precede pre-approval. As such, it doesn’t go into the same level of depth as pre-approval, but still helps buyers to get an idea of what type of loan rates they can expect. A primary difference, then, is that pre-approval is based on a “hard” credit inquiry, while pre-qualification is based on a “soft” inquiry.
You can learn more about the difference between hard and soft credit inquiries here. One of the major takeaways to know about is that hard inquiries are more specific and detailed, but may impact your credit score.
Among the details a hard inquiry considers are how you’ve paid off loans in the past, if you’ve responsibly been paying off existing debt with on-time payments, and any derogatory marks (like late payments, bankruptcies, civil judgments, tax liens, and more). IMCU chooses to only provide pre-approvals in order to provide the most confident quote for our members.
Now, you may be wondering whether you can get pre-approved for a car loan without it affecting your credit. And while loan pre-approvals do trigger a hard credit inquiry, the impact on the borrower’s credit score is relatively minor and short-lived. According to Experian, this type of inquiry “shouldn’t affect your credit scores for more than a year,” and, “in most cases, inquiries cease to have any significant impact on scores after just a few months.”
Steps to Prequalify for an Auto Loan
There are several steps you can take in order to prequalify for an auto loan. Nerd Wallet recommends:
Checking your credit report
Applying with multiple lenders
Getting preapproved with the best rates
Setting a budget based on the loan
Finding the perfect vehicle
Reviewing the loan terms
Finalizing the loan
Making payments on time
When you check your credit report, you can find and fix any mistakes or fraudulent activity as well as determine the interest rate you’re likely to receive. Once you have this information, you should apply for a loan from multiple lenders. This will give you an opportunity to find a lender that will offer you a great rate and terms that work for your budget. Select the pre approved loan from the lender that offers you the best deal. You’ll want to look at the:
Loan length: The amount of time you have to pay off the loan
Down payment: how much you will spend out of your own pocket
Interest rate:
The percentage you’re charged to borrow money. Set your budget based on the amount of your pre approved loan. You want to ensure that the monthly payment amount doesn’t exceed 10 percent of your monthly income.
Search for your perfect vehicle using online tools that allow you to filter your options. You can compare offers from various dealers with the amount that you’ve been preapproved to find a car you can afford.
When you’re ready to make your purchase, you need to carefully review the loan paperwork. Make sure that you look at the numbers to ensure no extra fees have been added and that it matches what you had previously agreed upon. Keep your credit rating high by always making your monthly payments on time.
Pre Qualification versus pre approval
A prequalification gives you an idea of what a lender may contribute in terms of amount and interest rate on your loan. Most of the time, a prequalification hasn’t gone through a complete review process by the lender.
If you’re worried about impacting your credit score, a prequalification is your best option. It only involves a soft credit pull, which will not impact your score. It can also be a great way to see what you can borrow without fully committing.
A preapproval is an offer for a loan, including the conditional terms of the amount and interest rate that you can expect over time. Since this process gives you the actual amount you can expect, it’s much more involved. You’ll likely be asked about your pretax income, the amount you want to borrow, your housing information, your current employment information, your Social Security number and a copy of your ID. From there, the lender will do a hard credit pull, which may affect your credit score. Once the lender has all your credit information, you may be given a loan offer that will help you plan out your car payment costs.
A preapproval is a great option if you feel ready to purchase a vehicle and want to see exactly how much you can afford. While it’s a great way to find out what you’re working with financially, it’s not a guarantee of loan approval or loan terms.