when looking for pre-approval on a car loan you should not


When it comes time to buy a new car, getting pre-approved for a car loan can give you a major advantage. Being pre-approved means you already have an offer in hand from a lender when you walk into the dealership. This puts you in a much stronger negotiating position, as the dealer knows you already have financing lined up.

However, there are a few key mistakes people often make when seeking pre-approval on a car loan. Avoid these errors, and you’ll be in a much better position to get the best possible auto loan terms.

Applying With No Clear Budget

The very first thing you should do before even thinking about getting pre-approved is deciding on your budget. How much can you afford to spend on a monthly car payment? What purchase price range are you looking at? Going into the pre-approval process blind could result in you getting approved for far more financing than you actually need.

Sit down and run the numbers to determine the monthly payment you’re comfortable with. Factor in not just the car payment, but also estimated insurance, gas, and maintenance costs. Experts advise your total transportation expenses should be 15% or less of your take-home pay.

Once you have a budget and price range in mind, you can shop for financing and cars that align with what you can realistically afford. Otherwise, you risk being approved for too much borrowed money and overextending your finances on a car that stretches your budget too far.

Applying With No Clear Budget
Applying With No Clear Budget

Only Applying at One Lender

Another common pre-approval mistake is applying at just a single lender, whether it’s your usual bank, credit union, or an auto manufacturer’s financing arm. The problem is rates and terms can vary significantly between lenders. So by only applying at one place, you won’t know if another lender may have given you a better deal.

It’s smart to check rates from 3-5 lenders when seeking pre-approval. This allows you to compare interest rates, fees, loan terms, and approval amounts. With multiple pre-approval offers in hand, you can go with the best loan option available.

Some top lenders to consider for auto loan pre-approval include banks, credit unions, and online lenders like Capital One, Discover, Wells Fargo, and CarsDirect. It doesn’t take long to submit a few pre-approval applications online.

Not Checking Your Credit First

Before applying for pre-approval, it’s wise to check your credit reports and scores. This gives you an idea of what interest rate range you may qualify for, based on your credit history. Currently, excellent credit (FICO scores above 720) can qualify you for the lowest auto loan rates from most lenders, under 5% APR.

You can request your free annual credit reports at www.annualcreditreport.com and many credit cards provide free monthly credit scores on online accounts. Or you can purchase credit scores from consumer reporting agencies.

Review your reports and correct any errors promptly. Pay down balances on credit cards and other revolving accounts, as high utilization can lower credit scores. Allow time for any credit boosting actions to be reflected in your latest scores before applying for auto loan pre-approval.

Not Checking Your Credit First
Not Checking Your Credit First

Applying and Getting Approved Too Early

Timing is important when seeking pre-approval on a car loan. While it’s fine to start checking potential rates and terms earlier, you don’t want to complete full applications too far in advance. Here’s why timing matters:

  • Credit inquiries from applications can lower your scores slightly. Waiting to apply until just a month or a few weeks before purchase avoids extra hits on your credit.
  • Income verification is required for pre-approval. Provide this documentation right when needed to reflect your current earnings.
  • Rates and deals can change over time. What’s currently offered may differ 90 days from now. Only get fully approved when you plan to buy very soon.
  • Pre-approvals typically last 30-60 days. Don’t get approved 6 months before you plan to purchase.

Essentially, you want to be far enough along in the shopping process to need the pre-approval in the near future, but not so far ahead of time that you apply at the wrong moment. Aim to get pre-approved 1-2 months before you’ll be ready to buy.

Not Having Your Information Ready

To complete auto loan pre-approval applications, you’ll need to provide specific documents and information to lenders:

  • A copy of your current driver’s license
  • Your Social Security Number
  • Home address information
  • An estimate of your annual income
  • Your employer’s name and address
  • Documentation to verify your income sources

Gathering these items beforehand ensures your application can be processed promptly. You’ll also want your down payment amount ready and an idea of the car’s MSRP or value if it’s a used vehicle. Being prepared with accurate details results in a faster pre-approval experience.

Not Having Your Information Ready
Not Having Your Information Ready

Forgetting to Read the Fine Print

Don’t speed through pre-approval offers without checking the specifics first. Just like with any major financial transaction, it’s essential to read the fine print on an auto loan offer before accepting it. Be sure you understand and agree to these key factors:

  • Exact loan amount approved
  • Interest rate and APR
  • Loan repayment term length
  • Required down payment
  • Details and amounts of any fees
  • Loan conditions or stipulations

Sometimes pre-approvals will have restrictions, like requiring you use the loan within a certain timeframe, maintain your current income, or purchase from certain dealers. Read through all the pre-approval documents carefully to catch any fine print details.

Not Understanding the Impact on Your Finances

Pre-approval offers will state the exact monthly payment amount on the auto loan amount offered. Make sure you understand how this payment fits into your overall budget and that it aligns with the payment you can afford.

It’s also important to realize that while pre-approval provides an estimate of what your financing terms may be, the final terms are not guaranteed or locked in until you finalize the deal at the dealership.

So if the monthly payment ends up higher than you expected once you negotiate the car purchase price, you have the option to walk away or renegotiate to get it down to your target number.

Likewise, if you plan to trade in a vehicle you currently owe money on, realize your finance balance will be rolled into your new loan amount, which can equal higher monthly payments. Be sure to factor this into any pre-approval terms you receive.

Not Understanding The Impact On Your Finances

Getting Pre-Approval car loan is Just the First Step

A final mistake to avoid when seeking pre-approval is thinking it means you’re all set to buy a car and just have to choose one you like. In reality, pre-approval is just step one of the auto financing process and doesn’t guarantee you the exact terms stated.

You still have to negotiate a purchase price at the dealership, decide on a specific car, finalize the financing application with the lender, and close the deal. If the vehicle price changes, so may the loan amount needed and the interest rate. Requirements to qualify can differ between initial pre-approval and final loan approval stages too.

See pre-approval as an estimate only. Stay engaged throughout the rest of the financing and purchase process to ensure you get a car loan and payment that aligns with both your budget and the pre-approval offer you received initially.

Avoiding these common pre-approval mistakes puts you in a stronger position when buying a car. Being prepared with accurate information, shopping different lenders, and understanding the full process results in auto loan financing that matches your budget.

Tips for negotiating the purchase price at the dealership

Do your research ahead of time on fair purchase prices for the make and model you want. Use online price guides like Kelley Blue Book and Edmunds to see the invoice price, MSRP, and market value in your area. Bring someone with strong negotiation skills to help if you don’t feel comfortable haggling.

Be willing to walk away if you can’t get close to the price you want. Don’t fall in love with one specific car. Negotiate the vehicle price first, before discussing trade-in value or financing terms. This should be your main focus.

Point out competitive vehicles at other dealers and what they are pricing them at. Leverage this during the negotiation. Ask for any applicable rebates, incentives, or dealer discounts to help lower the price. Consider visiting dealerships near the end of month/quarter when sales staff need to hit quotas.

Tips For Negotiating The Purchase Price At The Dealership
Tips for negotiating the purchase price at the dealership

Common mistakes when finalizing the loan application

Not reading all the terms again before signing. Rates or fees may differ from initial pre-approval. Agreeing to unnecessary add-ons like extended warranties that increase the loan amount. Putting little or no money down if you can afford a larger down payment to get better rates.

Stretching the loan term to 6-7 years to lower payments, when a shorter term costs less overall. Not having your financial information ready for the final application. Not running the final numbers to ensure monthly payments fit your budget.

Key differences between pre-approval and final approval stages:

  • Pre-approval provides estimated terms based on a soft credit check. Final approval is after a hard inquiry when your loan is run. Pre-approval terms are not guaranteed. The rate or amount offered can change in final approval.
  • Pre-approval is based on limited information provided. Final approval requires income and identity verification. Pre-approval checks if you qualify for financing in general. The final approval is for a specific car loan amount and terms.
  • Pre-approval only lets you estimate payments. Final approval locks in the monthly payment amount. Pre-approval comes before you negotiate a car price. Final approval comes after price negotiation, when loan amount is set.
Tips For Negotiating The Purchase Price At The Dealership
Tips for negotiating the purchase price at the dealership


Does a pre-approval for car loan hurt your credit?

Getting pre-approved for a car loan does not hurt your credit. When you apply for pre-approval, the lender will do a soft inquiry on your credit report, which does not affect your credit score. The hard inquiry that could slightly ding your credit comes later if you move forward with a loan using the pre-approval. Overall, a pre-approval is a smart move to understand your financing options before shopping.

What happens when you are preapproved for a car loan?

When you are preapproved for a car loan, it means a lender has already reviewed your credit and income information and conditionally approved you for a loan up to a certain amount. Pre-approval gives you an estimate of the loan amount, interest rate, and monthly payments you qualify for. It doesn’t guarantee a loan, but shows dealers you are a serious buyer and can help strengthen your negotiating position.

Is a pre-approval a guarantee for a car loan?

No, a pre-approval is not a guarantee for a car loan. It is conditional on verifying the information you provided for the pre-approval is accurate. The lender still needs to see proof of income, driver’s license, insurance, etc. And the pre-approved terms may change if new information comes to light, like a different loan amount or car value. So a pre-approval provides an estimate, but the final loan terms are not guaranteed until complete approval after purchase.

Why should you get preapproved before buying a car?

Getting preapproved before buying a car gives you leverage to negotiate the best deal. You’ll know what rates and terms you qualify for and can shop with confidence. It also shows car dealers you are a serious buyer so they may be more willing to negotiate. Pre-approval makes the financing process faster at the dealership. Also, if you have your own financing, the dealer cannot inflate the interest rates. Pre-approval gives you control and certainty during what can otherwise be a stressful purchase.


Getting pre-approved for an auto loan before visiting dealerships puts you in a position of strength and knowledge. However, it’s important to avoid common mistakes like only applying to one lender, neglecting to check your credit, and accepting terms too early.

Be an informed shopper by researching fair prices, having your information ready, and reading all details carefully. Remember that pre-approval is just the starting point – stay engaged as you negotiate the vehicle price, trade-in value, and finalize the financing.

With the right preparation and diligence, you can use the pre-approval process to secure favorable loan terms and make the most of your car buying experience.

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