Car Loans: What Is the Difference Between Pre-Qualification and Pre-Approval?

From time to time, you may see offers to get pre-qualified or pre-approved to buy a car, especially when you are actively researching cars to buy or loan providers. What do these words actually mean? Are they a guarantee that you can buy a certain car?

To understand this auto finance industry jargon, we asked financial experts to explain these terms. You might be surprised at what we discovered.
When you are done reading this article, you will know the difference between these terms and when to use each in the process of your car shopping journey.

What is car loan pre-qualification?

Tim Owens, a consumer vehicle lending executive at Bank of America answers this one for us, "Prequalified means you have an estimate of how much you can afford based on several factors, mainly income. This is typically used for prospective buyers who are looking to have a better understanding of what is possible when car shopping."

Sonia Steinway, CEO of Outside Financial explains, "If you submit your information to a car loan site (like Outside Financial) and they run a soft pull of your credit history, you're considered pre-qualified."

When you shop for a car loan, rates for people with less-than-perfect credit are hard to track down. Most lenders say "rates as low as" and credit unions and banks only say the starting interest rate (for people with prime and excellent credit scores), not what it will be for people who have a credit score that they aren't so proud of.

So, if your credit score is 700 or better, you can mostly see the rates as advertised. While the national average FICO score is at an all-time high, not everyone has a score over 700.

Generally, you provide some unsubstantiated information about your income and employment, a soft-pull is done on your credit, and helps potential borrowers know if they are in a place to get a good loan. It can help to estimate rates and terms, as well as the budget level for shoppers.

"It's important to remember," says Owens, "that with prequalification, you're not actually approved for financing, but you are given an estimate of what you could be approved for."

What is car loan pre-approval?

"On the other hand," says Owens, "pre-approval is as close as you can get to confirming your creditworthiness without having a purchase contract in place. It means the lender has examined your income, credit, and other expenses to determine the loan amount you qualify for."

Another way that people often see pre-approved auto loan offers may sound more familiar. Sometimes, you can see this type of offer from your bank or credit union in email or snail mail offers. Steinway explains "If instead the site bought a list of people with certain credit history from one of the credit bureaus and sent a marketing email or letter to each one, those potential borrowers would be considered pre-approved."

While it is a baby step up from prequalification, it still isn't guaranteed approval. You generally don't have to have the car already picked out to get pre-approved, but you may have to include a budget-level in your application.

Be warned: some financial institutions may do a hard pull of your credit report for a pre-approval. Be sure to look for keywords mentioning that applying for pre-approval will not affect your credit score.

If a pre-approval is completed with a hard pull on your credit score, Chane Steiner, CEO of Crediful explains, "they will stay on your credit report for about 12 months."

Honestly, it's not the end of the world. Steiner suggests that you "Complete all of your pre-approval applications in the span of 14 days, so it has the impact of just one pre-approval application."

Pre-qualified vs pre-approved

Sometimes these terms are used interchangeably, but both are generally entry-level steps to understanding your car loan options. However, "both are different than being approved," says Steinway.

"Pre-qualifications aren't as strong as pre-approvals," explains Steiner, "as they are based off of less information and do not guarantee approval for the actual loan. While pre-approvals are stronger than pre-qualifications, they don't guarantee approval either, though, your chances are stronger, especially if nothing changes in the meantime. They also give you more bargaining power at the dealership because it shows you have the assets for the purchase."

"Pre-approvals can be either a soft pull or a hard pull," explains Mike Todaro, Sales Manager at Matt Blatt Kia of Toms River. So, while pre-qualification generally comes with a soft credit pull, pre-approval may or may not.

The end goal: loan approval

Actual loan approval (without the pre), requires a hard pull on your credit against information about the specific car you are looking to finance to see if you can be approved to borrow money for it.

Many lenders restrict their funding to specific model, mileage, and other restrictions, with clear lines that they won't cross when it comes to specific vehicles.

While "pre-approval and pre-qualified terms are subject to change," reminds Steinway, "approval terms are not, at least during the time that the approval is active."

Only once you have an official loan approval are you able to make a purchase. Prior to that, it is still possible that your pre-approval or pre-qualification may not pan out.