Topics:Car Loans 101 Car Shopping Tips Co-Signing Downpayment GAP Pre-Approval Car Loans and Credit Teen Drivers
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.
When you are shopping for a new car or truck, most finance experts suggest that you get pre-approved for an auto loan before you select a car. But is this car financing advice relevant for people with all types of credit, even bad credit? We asked industry experts to help us understand the auto loan pre-approval process as it applies to consumers with less-than-perfect or downright bad ratings with the credit bureaus. When you finish this article, you will better understand how the pre-approval process works and how it benefits you if you have bad credit. Can you get a pre-approved loan for buying a car if you have bad credit? "Yes, absolutely," says John Vincent, senior reporter for U.S. News & World Report Best Cars, "you can get pre-approved for a loan if you have bad credit, and it’s crucial you do so." While bad credit consumers definitely can seek pre-approval for their vehicle purchase, they won’t be successful with every traditional lending institution. Most big banks and nationwide lenders have a minimum credit score as part of their lending requirements. Much of the time you need to have good credit or better to get a good rate to buy a car with these big lending contenders. "There are a number of auto lenders that provide pre-approvals with bad credit," explains Chane Steiner, CEO of Crediful. Car buyers with poor credit history will need to check if they can get a pre-approved car loan from one of these specialty companies by filling out an online application. In addition, Vincent explains, "Many lenders, especially small banks and credit unions, have special programs to help borrowers with damaged credit get back on their feet." These may not be big-name financial institutions, but there are well-reputed, smaller lending institutions as well as online lenders that specialize in car loans for people with subprime credit. Although, it won't be the best loan terms available. "Your interest rate will be higher than someone with better credit," says Steiner, "However, it is possible [to get pre-approved with bad credit].""You can expect to pay more for a loan if your credit isn’t good — as much as three times the rate that someone with excellent credit might pay," says Vincent. When you are car shopping with a poor credit score, how can pre-approval help? “The worse your credit is, the more important it is to compare your rate options,” explains Sonia Steinway, CEO of Outside Financial. “Rates (and rates of approvals) can vary wildly from lender to lender, depending on how they make their underwriting decisions. Getting a pre-approval helps shopping in a few ways: First, it can help you set your budget. If you know you can only afford a certain amount per month and a certain down payment, getting pre-approved will help you figure out the max you can pay for your vehicle. Second, only loans outside the dealership avoid the dealer’s markups and fees. We calculate that the average dealer markup on a new car loan and related products is nearly $1,800 — more than dealers make on selling you a car! Third, getting pre-approved sets a rate for negotiating with the dealer. If they’re able to match or get you a better rate than you bring from outside, you can take it knowing you’re getting the right deal for you. Just make sure the dealer is actually matching your pre-approved offer and not stretching out a larger loan amount by increasing the loan term or giving you a lower APR but packing in ancillary products at inflated prices.” What can happen if you don’t look into pre-approval? Have you ever gone to the store to buy something, spent quite a while picking it out and falling in love with it, only to realize that you forgot your wallet, don't have enough cash, or your card is declined when you get to the checkout? That feeling is the worst, but we’ve all been there. "Acquiring a reasonable loan is more difficult for [people with bad credit], says Mike Todaro, Sales Manager at Matt Blatt Kia of Toms River. He adds, "Getting a pre-approval beforehand will save you wasted time at a dealer." It will also save you from that dejected feeling we talked about before. Todaro illustrates what he means about wasted time with this example: "Tim has a 438 credit score, is looking at a Kia Sorento ($27,000 SUV), and doesn't have pre-approval. He'd gone through test drives and ultimately spend his whole day finding the perfect SUV. When it comes time for securing financing, he gets denied for a loan of that amount. Tim leaves and tries another dealership, only to have the same events occur. This situation is frustrating and makes the car buying experience unpleasant and unnecessarily time-consuming. With a pre-approval, Tim would know that if he did find his perfect vehicle, he'll be taking it home." "By getting a pre-approved loan," explains Vincent "you’ll have a good idea what kind of car fits into your budget, given the interest rate you qualify for. Better to know what cars you can afford, rather than falling in love with a car and then struggling to figure out a way to pay for it." You will save time and save yourself from heartbreak after spending a whole day falling in love, only to have your loan application for in-house financing denied. Why is it important for bad credit consumers to seek pre-approval before car shopping? "Pre-approvals mainly benefit people with bad credit or no down payments," advises Todaro. But why? It helps shoppers know what they can afford. "Having a pre-approval before shopping for a car sets up a range of what you'll be able to buy," explains Todaro. "Your options and criteria are available to you before you get your mind set on a vehicle." This will save you from the wasted time and heartbreak that "Tim" experienced. "[I]t's even more important," Steinway adds, “for consumers with bad credit to seek car loan pre-approval because those borrowers are particularly vulnerable to getting a bad deal at the dealership. Some lenders specialize in working with borrowers with bad credit or with limited credit histories." If you think about it, auto loans are available from banks, credit unions, online lenders, and lastly, from a dealership's in-house financing or contracted lending partners, which may be limited as to what they can approve if you have a bad FICO credit score. With a dealership financing, your last step of the day, after checking out all the cars, is to see if you can get approved. Why not see what your options are before heading out? Online, you can check with a variety of websites to see what kind of rates and terms you would likely qualify for, all with a soft credit check. Be warned: "It's an unfortunate truth that some unscrupulous dealers in the marketplace prey on consumers with bad credit," advises Vincent. "They have no problem putting people into extremely costly loans, or they have no chance of paying back. Having a pre-approved loan helps you avoid these tactics." What if you are having a hard time getting pre-approved financing? It is harder for people with a bad credit rating to get the green stamp of pre-approval for their car purchase, but it is worth it. This may be hard to hear, but it is the truth. You will have a harder time getting pre-approved, than someone with good credit. "If you get denied for a pre-approval," says Todaro, "try to come up with some money to put down, find a cosigner, or take time to rebuild your credit." "Why?" he asks. "With money down, the amount needed to borrow will be lower and result in a higher likelihood of an approval. With a cosigner, there are now two people liable for the money borrowed which means the lender has more insurance." Your next steps will be to take some time to reestablish your credit or improve your credit. "If that's the case," Tony Arevalo, from Carsurance, also suggests, "consider improving your credit score by paying off existing debt, paying bills on time, and avoiding new applications until your credit score is improved." "Over time," explains Todaro, "your credit will increase and a pre-approval and new car will be possible!" "If you don't have time to wait for that," suggests Arevalo, "you can also apply for a loan from the car dealership. But, be aware that the interest rates at a dealership are much higher than at a money lending institution." If you do go that route, you may want to see if you can get pre-approved through the dealership’s in-house financing online, before making "Tim's" mistakes. You need a budget before you shop, or you may be wasting your time. No matter your credit situation, getting pre-approved for a loan has benefits. Even if you have a bad track record with the major credit bureaus, you should still try to pre-approved. This process gives you options and helps you know what monthly payment you can afford, whether you have good credit or not.