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If you're in the market for a new car, chances are you're doing your research. Looking at different auto manufacturers, comparing makes and models, and checking prices are a good start—but don't forget to consider your car loan if you plan to finance your purchase. Shopping around for the best auto loan could save you a significant amount of money.
Seeking preapproval for a car loan before you head to the dealer can clarify your spending power and also give you leverage when negotiating the deal. And while getting preapproved can ding your credit a few points, the effect is short-lived. Here's what you need to know.
What Is the Difference Between Prequalification and Preapproval?
The terms preapproval and prequalification are sometimes used interchangeably, but they may mean two different things depending on your lender and the type of loan. Both are ways that lenders initially assess how likely you are to get approved for a new loan and estimate your loan amount, interest rate and terms.
Prequalification typically involves a soft credit inquiry, which does not affect your credit score, though some lenders may skip this altogether. You may also need to provide basic information like your annual income and monthly expenses. The prequalification offer you receive could change, sometimes significantly, once the lender takes a deeper dive into your credit during the application process.
The preapproval process for auto loans (and mortgages) is more involved than prequalification, resulting in a more accurate approved loan amount. The lender will conduct a hard credit inquiry to review your credit more thoroughly and may also require personal and financial details such as your employment status, monthly income, debt balances and more. They'll then tell you the amount you can borrow, with some lenders even providing an actual check you can use at the dealership to boost your bargaining power.
How Do Car Loan Preapprovals Affect Your Credit?
Car loan preapprovals trigger a hard credit inquiry when the lender checks your credit, which could knock your credit score a few points temporarily. The good news is most credit scoring models allow consumers to shop around for auto loan rates without seriously damaging their credit scores. Multiple hard inquiries for auto loan preapprovals are generally treated as a single inquiry by scoring models if they occur within a 14-day window.
Having a preapproval letter does not guarantee you'll get approved for a loan. If there are changes in your finances between when you are preapproved and when you apply for the loan, you could ultimately be declined. One instance where this could occur is if you were to lose your job during the application process.
Check Your Credit Before Applying for Auto Loans
It's wise to check your credit three to six months before you plan on financing any large purchase. You can get your credit score and credit report for free with Experian to see where you stand. This allows you to spot problem areas you can address now to boost your score before applying for an auto loan. If you have time to work on improving your credit score, you could be rewarded with better interest rates and terms on your car loan.
Knowing your credit profile can help you narrow your search to auto loan lenders that are most likely to approve you based on their credit requirements. From there, you can seek preapprovals with multiple lenders, shop around, and look for the best offer for your budget.
The Bottom Line
Getting preapproved for an auto loan clarifies your potential borrowing power, interest rate and terms. While it does result in a hard inquiry, which will show up on your credit report, it usually has a minor effect on your credit that subsides in a few months.
Preapproval can help put you in the best position to bargain with car dealerships and shop around for an auto loan that fits best with your budget. Opting for free credit monitoring can keep you informed and prevent unwelcome surprises along the way.