What is a preapproved auto loan? 

If you’re ready to buy a new or used vehicle, and you’re not one of the fortunate few who can just write a check for the car, at the top of your to-do list should be getting preapproved for the loan you’ll need. It’s a key way to give yourself an edge toward getting a good deal on your purchase.

Getting preapproved means you shop around for the lowest-cost loan that meets your needs and have that loan in your pocket before shopping for your best vehicle deal. Those are two separate transactions, but they can easily get mixed at a dealer in ways that cost you money overall.

It’s better to shop around and not just throw yourself at the mercy of the dealer, says Phil Reed, automotive columnist. 

We discuss how to get preapproval in this story, but bear in mind you’ll want to move beyond that to secure the third-party loan if you end up choosing it. That involves more paperwork with your lender, and specific instructions vary. But preapproval at the beginning of the process should help in a roadmap to the finish line.

How to Get a Preapproved Car Loan

Know Your Credit Score

Your credit rating is the key factor in the interest rate — the price — you’ll pay for a car loan. Scores range from 300 to 850, and knowing yours gives you an idea of the rate you should expect from a lender, as well as alerts you to any problems you might have getting a loan. It also will allow you to check your report for errors. Finding out your score is free. 

There are three major national credit agencies (Equifax, Experian, and TransUnion) used by various lenders to aid loan decisions, and your scores might vary slightly among the three. But you can order free reports from all three from a single site — usually every 12 months under federal rules, though special pandemic rules will let you get them as often as weekly through April 2022.

Shop Around

A loan — renting someone else’s money — is a product just like the car you want, and prices vary. Different lenders might quote different interest rates for the same credit score and might differ on other factors, such as the down payment required, the total amount they will lend on a new vehicle, and the maximum months to pay it back. For a used car, expect slightly higher rates and tighter limits on loan amounts and length, as well as possible limits on the car’s age and mileage and where you can shop (private-party sales might be excluded, for example). A good source of more information on car-loan shopping is available from the federal Consumer Financial Protection Bureau.

You can get a general idea of the loans available by contacting lenders by phone, going online, or visiting a lender’s office. Credit unions or banks where you already do business are a good place to start looking for a good rate. There are also online lenders specializing in auto loans. Various personal finance websites offer lists of lenders and current rates — there’s one on the finance site Bank rate — but beware that the advertised rates might be available only for the top credit scores. According to Equifax, average rates on new-car loans in the second quarter of 2021 ranged from 2.34% for the best credit (credit scores above 781) up to 14.59% for the lowest scores (scores from 300 to 500) for new cars, and from 3.66% to 20.58% for used cars.

Consider Prequalifying

If you’re unsure about what to expect with your credit rating, you can first seek to prequalify for a loan with several lenders. Note that prequalifying is not the same as getting preapproved, such less formal inquiries do not commit the lender to make the loan, nor do they guarantee you’ll get the estimated rate quoted, but they can serve as a way to get more information about rates and to help decide where to eventually apply.

Getting prequalified should involve what’s known as a “soft” credit check just to evaluate you as a potential borrower and estimate a loan rate, not a “hard” credit check, which can temporarily ding your score slightly. Beware of any lender asking for your Social Security number, which would allow a hard check, according to Reed.

Apply for the Preapproved Loan

To get preapproval, you now actually apply for a loan and, if you’re approved, the lender commits to a loan amount and length at a given interest rate. While it helps any buyer, this can be even more important if you have spotty credit because you’ll have dealt in advance with any issues and gotten yourself set. Once preapproved, you’re ready to shop for your vehicle with financing in hand.

You should apply to more than one lender for preapproval, so you can compare actual terms for the best deal.Cars.com offers a free loan calculator that can help you compare the loan offers, and you should do them all quickly because multiple applications each will trigger the kind of “hard” credit check that can affect your rating. Credit agencies, however, usually will treat multiple applications for a car loan in a short time — generally about 14 days — as a single application. Then, as with any loan, carefully read the offer you choose to be sure you understand all the details and fees before you sign.

Why you should get a preapproved car loan

Preapproval might sound like a lot of trouble, but it’s worth it. Here’s why: 

It Helps You Budget. 

It Gives You Leverage at the Dealer. 

You’ll know a Good Loan When You See It. 

You Can Leave the Finance and Insurance Office With Your Budget Intact.