Prequalify vs Preapproved: Understanding the Difference Between Car Loan Offers

Getting ready to buy a new car is always an exciting time. But it can also be stressful trying to figure out how you’ll finance such a large purchase. When you start shopping around for an auto loan, you’ll likely come across the terms “prequalify” and “preapprove.” What exactly do these mean, and how are they different?

As an experienced car buyer, I can tell you these are two common types of car loan offers. Prequalifying gives you an estimated rate and loan amount you may be eligible for based on some basic financial information. Preapproval is a conditional loan offer from a lender pending full underwriting.

While they sound similar, there are some key differences between prequalifying and getting preapproved for an auto loan. In this article, I’ll break down what each entails so you can better understand these financing options.

What is Prequalifying for a Car Loan?

Prequalifying gives you a preliminary readout on what kind of auto financing terms you may be able to obtain. To prequalify you provide a lender with some basic details about your finances such as

• Income
• Existing debts
• Credit score range

Based on this information, the lender runs your numbers through their underwriting model and gives you an estimate of the loan amount, interest rate, and monthly payments you may qualify for.

A prequalification is not an official loan offer or a guarantee you’ll get those exact terms But it allows you to get an idea of what ballpark offers you can expect,

I like to prequalify with a few different lenders to compare potential rates. It doesn’t impact my credit since the lenders only do a soft credit check at this stage.

Benefits of Prequalifying for an Auto Loan

Here are some of the advantages of prequalifying for car loan financing:

• Get a preliminary read on your auto loan options
• Estimate the monthly payments you can afford
• Shop and compare rates from multiple lenders
• Gives you a starting point to negotiate at the dealership
• Soft credit check won’t hurt your credit score

Prequalifying is a great way for me to assess my financing options completely risk-free. I can submit prequalification forms to banks, credit unions, and online lenders to find the best possible deal.

What is Preapproval for a Car Loan?

Preapproval is a conditional loan offer from a lender pending full underwriting. To get preapproved you’ll go through much of the actual loan application process with a lender.

Here’s what preapproval typically entails:

• Submitting your Social Security Number so the lender can pull your credit reports
• Providing proof of your income and employment
• Allowing the lender to verify your debts and assets
• Meeting the lender’s preapproval credit score and debt-to-income requirements

If you meet all the criteria, you’ll receive a preapproval letter that states the specific loan amount, interest rate, and terms you are conditionally approved for.

But this isn’t yet a final loan approval. The lender still has to underwrite the full application once you purchase a vehicle. As long as your financial details remain the same, you should ultimately get the loan as outlined in your preapproval letter.

Benefits of Getting Preapproved for an Auto Loan

Preapproval offers several advantages when financing a car:

• Know your exact rate and monthly payment before shopping
• Strengthens your negotiating position with the dealer
• Faster loan approval process when you’re ready to buy
• Locks in the preapproved interest rate for 30-60 days
• Preapproval rate can be used to negotiate with the dealer financing

I like to get preapproved because it gives me serious buying power at the dealership. The dealer knows I already have financing locked in, so they have to work hard to beat my preapproval rate if they want my business.

Prequalify vs. Preapproved – Key Differences

Now that you understand the basics of prequalifying and preapproval, let’s recap the main differences:

As you can see, preapproval requires a much more rigorous application process. You have to provide sensitive information like your SSN and undergo hard credit checks. That’s why I usually start with prequalification to get estimates from multiple lenders first.

Do Prequalified or Preapproved Offers Affect My Credit?

A common concern is whether getting prequalified or preapproved will hurt your credit score. The good news is prequalifying involves a soft credit check and doesn’t impact your score at all.

However, preapproval requires a hard inquiry when the lender pulls your full credit report. Hard inquiries can cause a small, temporary drop in your credit score, usually only a few points.

Here are a few tips to minimize the impact:

• Limit applications to no more than 2-3 lenders
• Keep all hard inquiries within a 45 day period – credit scoring models count multiple hard inquiries for the same loan type (in this case, auto financing) as just one inquiry if they occur in a short timeframe
• Avoid applying for new credit cards or loans while rate shopping for a car

As long as you limit hard credit checks and have good credit hygiene otherwise, preapproving with a couple lenders shouldn’t do much long-term damage to your score.

Can a Dealer Beat My Preapproved Financing Offer?

If you get preapproved, the dealer will still likely try to get you to finance through them. And yes, sometimes they may be able to beat your preapproved interest rate.

Here are some tips if the dealer offers you lower financing:

• Make sure to compare the full terms – not just the interest rate. The monthly payments including fees are what really matter.
• Be wary of super low teaser rates that jump up after a few months.
• Watch out for hidden fees in the dealer’s financing.
• See if the lender will match or beat the dealer’s offer first before accepting it.

The dealer makes money off financing, so they will push their own loans aggressively. Make sure to run the numbers and read the fine print before signing anything. Having that preapproval letter in your pocket gives you important leverage to negotiate the best deal.

How to Get Preapproved for an Auto Loan

If you want the benefits of preapproval, here are some tips for getting conditionally approved for car financing:

• Shop around: Apply with at least 2-3 lenders to find the best rate. Banks, credit unions, and online lenders all offer preapproval.

• Check eligibility requirements: Lenders publish minimum credit score and debt-to-income limits to qualify for preapproval.

• Gather documents: You’ll need pay stubs, tax returns, bank statements, W-2s, and anything else proving your income.

• List assets and debts: An application will ask you to list all assets like your home, savings accounts, investments, etc. as well as existing debts including mortgages, student loans, and credit card balances.

• Authorize credit checks: Part of the application includes giving the lender permission to run hard inquiries on your credit reports.

• Review preapproval terms: Once preapproved, carefully look over the offer details including loan amount, APR, fees, etc. Make sure you understand and agree to all the terms before accepting.

With a little preparation, getting that preapproval letter is very doable. It puts you in the driver’s seat so you can negotiate the optimal auto financing.

The Bottom Line

Prequalifying and getting preapproved both have their advantages when shopping for a car loan. Prequalifying lets you estimate your options with no risk, while preapproval gets you an official conditional financing offer.

Ultimately, having a preapproval in hand is the best way to negotiate with confidence. Now that you understand the difference between these two options, you can determine the right strategy to find affordable financing before setting foot in the dealership.