How to get preapproved for a car loan and gain negotiation power

When you’re financing a vehicle, you want to do all you can to control negotiations. Applying for auto loan preapproval is one way to have an edge when purchasing a vehicle. Taking this step means that a potential lender has looked at your credit history, application and required documentation and is willing to give you a formal loan offer of a specific amount.

This is different from prequalification, though the terms are sometimes used interchangeably. While neither guarantees approval, prequalifying with a lender requires only a soft credit check.

Getting preapproved for a car loan only takes a bit of additional time and ensures that you have a firm idea of your buying power and the interest rates and terms you’ll likely be offered.

Step 1: Organize the necessary documents

You can get preapproved for a car loan through online lenders, banks or credit unions. Whichever option you choose, the first step is gathering the necessary documents for an application. These include:

  • Personal information, like your name, Social Security number, driver’s license, contact information and home address.

  • Income, including your employer, its contact information and your annual income. The income documentation you may be asked to provide can include a W-2, tax return or pay stubs.

  • The amount you want to finance and the preferred auto loan term.

  • Trade-in information, if applicable.


Bankrate tip

To make the application process easier, gather necessary financial documents ahead of time and save them in PDF files on your computer.

Step 2. Shop around for loan options

Just like you shop around for your ideal vehicle, it’s also a good idea to compare different lenders. Your interest rates are determined by your credit history plus other factors — all of which may vary by lender. Securing an interest rate that’s even a tenth of a percentage point lower can make a big difference in how much you spend over the life of a loan.

What’s more, by shopping around and comparing offers from different types of lenders, such as banks, credit unions and online lenders, you may also be able to get more beneficial loan terms.

Banks may offer more competitive loan rates and larger loan amounts, while credit unions may offer better customer service. Online lenders may offer faster funding.


Bankrate tip

Check out Bankrate’s picks for the best auto loans to start your search.

Step 3. Submit the preapproval application

In most cases, the application process will be similar to a typical full loan application. You can apply online, over the phone or in person. If you choose to submit online, research the most reputable lenders.

No matter how you submit your application — online or in person — you can expect to spend about 15 minutes completing each application. Some lenders have a more extensive preapproval application process, and some may require a minimum credit score or information about vehicle age and mileage. Look for details about application requirements on lender websites before applying.

Once you’ve submitted the requested information, many lenders state that online preapproval applications are processed in just a few minutes.

Does getting preapproved affect your credit score?

Similar to applying for a loan, getting preapproved typically involves a hard credit inquiry. This can reduce your credit score by a few points, but the impact should only be temporary. The slight drop caused by a hard credit pull will affect your score for one year, though it can be present on your report for up to two.

To minimize the hit to your credit score when shopping around for lenders, be sure to submit all of your pre-approval applications within 14 days. This allows all of the hard credit inquiries to be treated as a single inquiry.


Bankrate tip

Once your loan is preapproved, you typically have 30 to 60 days to shop for a car before the loan offer expires.

Benefits of auto loan preapproval

Car loan preapproval offers many benefits, including putting you in the driver’s seat when negotiating the best deal and getting the most competitive interest rates available.

Protection against unnecessary add-ons

When closing a deal on a car, particularly when you buy a vehicle with dealer financing, the sales team will often try to push add-ons or warranties to increase their profit. This might include such extras as rust-proofing the vehicle, fabric protection or extended warranties.

A preapproved auto loan gives you a firm number to keep in mind. This can make it much easier to say no to extra costs that aren’t in your shopping budget when it comes time to finalize the sale.

Better grasp on expected cost

The true cost of vehicle ownership tends to be higher than expected for first-time buyers. A solid number for what you can borrow will make it easier to budget and keep your expectations grounded when shopping.

You should calculate potential auto loans in advance to know how much you can comfortably borrow. And when calculating your monthly costs, don’t forget to include the expense of auto insurance. You might even shop around for insurance quotes on the vehicle you’re considering buying so that you understand what the true, full cost will be.

Stronger negotiation power

Although dealership financing can be a good idea for some drivers, preapproval means you won’t feel pressured to use the salesperson’s suggested financing options.

Dealers will also see your commitment to getting a vehicle and will likely be willing to negotiate to get your business. They may even be able to offer a more competitive rate from their network of lenders.

Next steps

If you’re preparing to go car shopping, getting preapproved for an auto loan will give you a firm idea of how much you can spend. It also puts you in control when it comes time to negotiate.

Before submitting your preapproval application, gather the necessary documents.

And if you plan to apply online, be sure to research reputable lenders. Some of the best ways to do this include checking a lender’s Google reviews from previous customers and researching their rating with the Better Business Bureau and Trustpilot.