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Auto Loan Pre-Qualification and Pre-Approval: What’s The Difference?

2022-01-13T16:25:11-06:00Auto|

Gearing up to shop for a new ride?

If you need financing to make the purchase, it pays to know the difference between being pre-qualified and pre-approved for an auto loan. Although the terms are similar (and sometimes erroneously used interchangeably), they are two distinct steps in the car-buying process.

So, what is the difference between being pre-qualified and pre-approved for an auto loan? Let’s find out.

What does it mean to be pre-qualified for an Auto Loan?

The primary purpose of pre-qualification is to help you understand how much vehicle you can realistically afford based on information like your credit score and income.

You tell the bank, credit union, or lender basic information about your financial situation. Based on that, they provide the estimated annual percentage rate (APR) and loan amount for which you will qualify.

The important thing to know is that when a lender pre-qualifies you for a loan, they are essentially taking your word that the financial details you’ve provided are accurate. They only do a soft credit pull (so no hit to your credit score), and they don’t independently review your finances.

The upside to getting pre-qualified before you shop is that you better understand how much vehicle you can afford. You also won’t have a hard credit pull (which briefly dings your score).

There are downsides to pre-qualification, too. It’s important to understand that it is not a firm offer of credit, nor is the quoted APR anything other than an estimate. The estimated loan amount or APR is subject to change once the lender pulls your credit and reviews your finances.

The other drawback is that pre-qualification might be less attractive at the dealership. The dealer knows that a pre-qualification is not a firm offer of credit, so you lose some of the negotiating power you may otherwise have with a firm pre-approval in hand.

What does it mean to be pre-approved for an Auto Loan?

So now that we know what it means to be pre-qualified, what exactly does a pre-approval entail? Why might it give you more negotiation power at the dealership?

Unlike being pre-qualified, being pre-approved means you have gone through a more formal application and approval process.

To become pre-approved, a lender will independently verify the financial information you provide them. This info might include gross annual income, employment status, and credit history. This step will require a hard pull of your credit score, which will remain on your credit history for two years.

Going to the dealer with a pre-approval in hand gives you more buying power than if you only have a pre-qualification because the sales team sees that you are already approved to purchase a specific dollar amount. Plus, the APR that the lender quoted is unlikely to change much.

Why get pre-approved for an Auto Loan?

We suggest getting your pre-approval (versus just the pre-qualification) from a lender before walking into the dealership. Dealers like to sell cars as a “monthly payment” instead of a total amount — $300 a month sounds like less money than $30,000!

However, by looking at your monthly payment instead of the final price tag (plus interest), you run the risk of buying a more expensive vehicle than you wanted — and the dealer makes a bigger sale. But having a pre-approval for a specific amount means you are more likely to stick to your budget and avoid buyer’s remorse.

Plus, as mentioned earlier, your pre-approval shows the dealer that you are ready to buy, giving you that much more leverage on the sales floor.

Getting started

As you can see, there is a difference between being pre-qualified and pre-approved. Pre-qualification helps if you’re just getting started in the shopping process and want to know what you can afford without dinging your credit. Pre-approval is the next step and allows you to confirm your loan details and gives you more buying power.

Essentially, the difference between the two is that the pre-qualification serves as a non-binding estimate of what you can afford. The pre-approval requires the lender to verify your info — and puts you in a better position to buy.

Ready to roll? We offer competitive auto loan rates on new and used autos, plus we offer a quick and easy application process. Get started now!

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