If you're in the market for a new car, odds are you're doing your research. Taking a look at different auto manufacturers, comparing models and makes, and checking costs are a good start—but don't forget to think about your car loan if you plan to invest in your purchase. Looking around to find the best car loan can save you a lot of money.
Seeking preapproval for a auto loan prior to you heading towards the dealer can clarify your spending power and also give you leverage when negotiating the offer. Even though getting preapproved can ding your credit a few points, the effect is short-lived. Here's what you should know.
What Is the Difference Between Prequalification and Preapproval?
The terms preapproval and prequalification are occasionally used interchangeably, but they may mean two various things depending on your lender and the type of mortgage. Both are ways that lenders initially assess how likely you're to obtain approved for any new loan and estimate the 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 even have to provide basic information like your annual income and monthly expenses. The prequalification provide you with receive could change, sometimes significantly, when the lender requires a deeper dive to your credit during the application process.
The preapproval process for automotive loans (and mortgages) is more involved than prequalification, resulting in a more accurate approved amount borrowed. The lender will conduct a hard credit inquiry to examine your credit more thoroughly and can also require personal and financial details such as your employment status, monthly income, debt balances and much more. They'll then let you know the amount you can borrow, with a few lenders even providing a real check you can use in the dealership to enhance your bargaining power.
How Do Auto loan Preapprovals Affect Your Credit?
Car loan preapprovals trigger a tough credit inquiry when the lender checks your credit, which could knock your credit score a few points temporarily. The good news is most credit rating models allow customers to look around for car loan rates without seriously damaging their credit ratings. Multiple hard inquiries for car loan preapprovals are usually treated as a single inquiry by scoring models when they occur within a 14-day window.
Having a preapproval letter doesn't guarantee you'll get approved for a loan. If there are alterations in your money between when you are preapproved so when you apply for the loan, you could ultimately be declined. One instance where this could occur is that if you were to get rid of your work throughout the application.
Check Your Credit Before you apply for Auto Loans
It's a good idea to look at your credit 3 to 6 months before you decide to plan on financing any large purchase. You will get your credit score and credit report for free with Experian to determine where you stand. This allows you to spot problem areas you can address now to boost your score before you apply to have an car loan. If you have time to work on improving your credit score, you could be rewarded with better rates of interest and terms in your car loan.
Knowing your credit profile will help you narrow your research to car loan lenders which are most likely to approve you based on their credit requirements. After that, you are able to seek preapprovals with multiple lenders, shop around, to check out the best offer for your budget.
The Bottom Line
Getting preapproved for an auto loan clarifies your potential borrowing power, rate of interest and terms. Although it does create a hard inquiry, that will show up on your credit report, it always has a minor effect on your credit that subsides in some months.
Preapproval might help put you in the very best position to bargain with dealerships and look around for an car loan that fits best with your budget. Choosing free credit monitoring will keep you informed and stop unwelcome surprises along the way.