What Does Pre-Approved For A Car Loan Mean?

When you’re shopping for a new or used car, you may be considering financing at least a portion of the total cost. A vehicle purchase is expensive, and most people need a loan to get behind the wheel of the car of their dreams. As you start comparing options, you may find that lenders often offer pre-approvals for borrowers who qualify for loans. Understanding what pre-approved means and how to get a pre-approval can help you get more buying power and go into the deal with confidence. 

What Is a Car Loan?

Before discussing pre-approval for car loans, we should first describe what car loans are and how they work for borrowers. A car loan is a secured loan that uses a vehicle as collateral. The funds the lender supplies to the borrower can only go toward the purchase of a vehicle. A car loan’s term typically falls between 36 and 72 months. The borrower may need to pay a portion of the cost as a down payment to lower the total financed amount and the monthly payment. 

A car loan also includes interest, which is a percentage of the total loan amount. Your monthly payment includes the principal (the amount that goes toward repaying the loan), interest, and applicable fees. Your interest rate depends on the total purchase price, the value of the car you’re purchasing, and your credit and financial history. 

Car Loan Pre-Approval Process and Requirements

Before you start shopping for a new or used car, it’s helpful to review your financial situation to determine how much you can afford. Establishing a budget can protect you from falling in love with a car that costs too much. Your total automotive expenses shouldn’t exceed 15-20% of your monthly take-home pay. These expenses include your car payment, along with repair and maintenance costs, fuel, insurance, and parking. Figuring out how much you can afford for a down payment can also help you determine how much you can borrow.

After you establish your budget and set aside the money for a down payment, you can start the process of getting pre-approved for your car loan. A lender may offer pre-approval to a borrower who qualifies for specific loan terms. Pre-approvals are conditional, and the pre-approval process is not as intensive as going through the approval process. You can get a pre-approval document that outlines an estimated amount you are qualified to borrow,  plus an estimated interest rate based on basic financial information. 

The process of obtaining pre-approval on an auto loan involves submitting your personal and financial information to a lender. A lender might need the following:

  • Your name and identification number.
  • Your current and past addresses.
  • Your monthly income.
  • Your employment history.
  • Recent tax documents.
  • Information about any of your outstanding debts.

A driver’s license or state ID number will suffice for the first piece of information. Also, don’t forget to list all your income sources.

Benefits of Getting Pre-Approved for a Loan 

One of the advantages of going through the pre-approval process includes learning how much you can qualify for when borrowing money for a vehicle purchase. You might think that you may only borrow $5,000, but your pre-approval document might indicate that you can borrow up to $10,000. This information can help you as you’re comparing vehicle options. For example, you could potentially get a safer car or one that will last longer. 

Pre-approval can also give you power in negotiating a purchase price. You know exactly how much you can borrow, so motivated sellers may be more likely to work with you and offer a deal that you can afford. 

How to Get Pre-Approved for a Car Loan

Now that you understand the meaning of pre-approval and how it can benefit you when you shop for a car, the next step is getting pre-approved for your next vehicle purchase. Start the process by checking your credit. You can find free online credit scores and reports that won’t negatively impact your credit when you pull them. If you see anything that shouldn’t be there, you can take steps to remove items. If your credit could use some improvement, you may want to work on that before you apply. Your credit history is a significant factor in the pre-approval process. 

Having the necessary information readily accessible can make the pre-approval process go more smoothly. Gather all your identification documents, tax documents, pay stubs, other income verification details, and employment information. When applying with this information handy, you can quickly fill in the required fields. It’s best to apply for pre-approval with multiple lenders within a day or two of one another, as several hard credit inquiries may count as one when pulled close together.

Most lenders offer online pre-approval forms to simplify the process and reduce waiting time. You can consider applying with your bank since you already have a business relationship. Auto dealerships also typically offer financing options and can pre-qualify buyers who plan to purchase from them. For example, at North Coast Auto Mall of Cleveland, we have a quick and easy pre-approval form on our website that you can complete before you visit our location. After you submit, you’ll get an instant pre-qualification status that you can use when shopping our inventory of used models.

What to Do If You Don’t Qualify for Pre-Approval

The Equal Opportunity Credit Act requires all lenders to disclose why they deny applicants for loans. You can use this information to determine why you don’t qualify for pre-approval and make changes based on their concerns about your financial situation. For example, you could apply for a longer loan term to lower your monthly payment.

Another option is to improve your credit score by paying off at least some of your outstanding debt. If your low credit score is due to late payments, making payments on time for a few months could boost the score enough to qualify. If a lender denies your application due to a lack of credit history, a loan co-signer may help you get approved. Asking a family member with good credit to co-sign on your loan could also qualify you for a lower interest rate. 

Apply for pre-approval for an auto loan and start browsing the selection at North Coast Auto Mall of Cleveland. We make it easy and enjoyable to buy a used car.