When you’re looking for a new car, you need to start with a budget. If you don’t plan to pay in cash, you’ll need to find a lender who can help you pay for your car. Before you decide on what kind of car to purchase or which dealership to visit, start by thinking about which lender may be ideal for you. You can pre-qualify for a car loan with your lender of choice to find out how much you might be able to borrow towards a new vehicle.
What Is Pre-qualification?
Pre-qualification is a simple process where you submit some basic information, such as your income and credit score, then receive a quote of roughly how much you may be able to borrow from a particular lender, based on the information you provide. This isn’t the same as an offer, but it can help you find a starting range for your purchase. It also doesn’t affect your credit score, so you don’t need to worry about pre-qualification lowering your credit.
Not only will you learn more about your potential loan amount, but you’ll also find out more about the terms you can expect with this lender. For example, the lender can give you an estimated interest rate for a potential car loan with them. You can use this information to help create a realistic budget for your new car. While the amount may change when you apply for a loan, you’ll have a better idea of what you can spend after you complete pre-qualification.
How Is Pre-qualification Different From Preapproval?
Pre-qualification gives you an estimate, but preapproval provides more concrete information. Typically, car buyers look for preapproval later on in the car-buying process. Often, you’ll try to get preapproval for a loan when you’re ready to buy a car right away. During preapproval, lenders will offer a guaranteed amount and provide you with specific loan terms. When you pre-qualify for a loan, you’re only receiving an estimate, which can change.
Preapproval, unlike pre-qualification, does affect your credit score, so it shouldn’t be something car buyers do without carefully reviewing their options first. You don’t want multiple hard inquiries into your credit score, so be selective with the company you choose for preapproval. Pre-qualification allows you to check with as many lenders as you like without affecting your credit score.
One benefit is that when you go out to buy a car, preapproval lets you act as a cash customer, which gives you more power and certainty in the car-buying process. You’ll be able to shop without worrying about monthly payments or interest rates a dealer might offer because you’ll already have that decided with the lender you use for preapproval. You may also be able to negotiate a little more with the seller if you’re preapproved.
Why Should You Pre-qualify for a Car Loan?
When you’ve just started looking for a new car, pre-qualifying can help you learn more about what sort of loan you can expect in the future. You’ll also have a better idea of your potential budget, all without affecting your credit. This can guide you toward shopping for cars within your pre-qualified price range, rather than spending time looking at cars that it turns out you can’t afford.
If you pre-qualify for a loan, you may also be able to get preapproval for your loan from the same lender. Plus, when you pre-qualify, you won’t need to worry about seeking financing from the dealership. You’ll have more options.
How to Complete Pre-qualification
To pre-qualify for a car loan, you’ll need to complete a few steps and provide all the details a company would need to determine if they could offer you a loan.
1. Research Lenders
Before you start pre-qualifying for a loan, you’ll need to find a lender that you trust. You may be able to receive pre-qualification through your bank or credit union, if you belong to one, so that may be a great place to start. However, you can also look for online lenders that specialize in car loans. Comparing several lenders is a great way to find a company that offers a low rate or better loan terms.
Remember to check online reviews to find out more about the lender’s reputation and what other customers have said about them. After all, you’ll be working with this company to pay off this loan for months, if not years, so you want to be sure you choose a lender that treats you well.
2. Apply for Pre-qualification
Once you’ve narrowed down your list of lenders, you’ll want to fill out the forms for pre-qualification. Many lenders offer a simple form on their website that you can use, but some may require a phone call or a visit to a physical location. You can apply to as many companies as you like, since pre-qualification doesn’t affect your credit score.
You will want to gather any documents you need before filling out these forms. These may include:
- Details of your income
- Information about your employment
- Proof of your identity, such as a driver’s license
- A list of current debts you have
- Financial information
- Your credit score, whether exact or estimated
If you need to pre-qualify in person, consider calling ahead to be sure you have everything you need before you arrive.
3. Review Your Terms
Once you’re pre-qualified, you can look over the amount the lender has offered you and the terms of a potential loan with them. Compare these responses if you completed the pre-qualification process with multiple lenders. Consider the following information from each lender:
- Loan amount: How much money you may be able to borrow
- Interest rate and annual percentage rate: How much you’ll pay in addition to the loan’s principal
- Loan term: The number of months you’ll need to repay the loan
- Monthly payment: The amount you’ll pay every month
If you aren’t happy with the offer or offers you received, you can always look for another lender who might provide more favorable terms or find ways to improve your financial circumstances or credit scores to qualify for a better loan.
Before you start researching a new vehicle, try pre-qualifying for a loan to learn a little more about what you can spend. By setting a realistic budget from the start, you can find a car you love at a price you can afford.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.