Car loan pre-approval: How does it work?

William Jolly By on October 15, 2018
Pre-approval car loans

Car loan pre-approval can give you a serious leg-up in the buying process, and can also lead to some serious savings.

What is a pre-approved car loan?

A pre-approved car loan is an indication from a lender that you are eligible to apply for a car loan of a specified amount, having assessed your credit rating, liabilities and assets. Entering a car dealership with car loan pre-approval can help speed up the car buying process, as both parties are aware of what you have to spend.

Pre-approval isn’t a guarantee of the loan itself, so you’ll still have to contact the lender again (whether that’s online, over the phone or in a branch), for settlement. But it can be a good way to get ahead of the game and fast-track your way to a funky new set of wheels.

What are the benefits of car loan pre-approval?

A pre-approved car loan can be beneficial in that it grants you the power of knowing what you can afford before you go out to buy a car.

For example, if you’ve been pre-approved for a $20,000 loan, you’ll limit yourself to cars within that price range. Dealers won’t try to tempt you with a more expensive car, as they’ll also know you have a set budget.

Having this knowledge and confidence in yourself and your ability to secure the affordable car you want can also give you an edge in negotiating the sale price of the vehicle.

Without pre-approval, you may be at the mercy of persuasive car dealers whose job it is to squeeze as much money out of you as possible. Even if you’re strong-willed, that intoxicating new car smell can sometimes override your better judgement!

Also, car dealers often push their own dealer finance options, so if you have a pre-approved car loan, the dealer may offer finance at a lower rate to encourage you to finance the car through them. Just make sure you take into account all of the costs of the finance offer (not just the rate) before you agree to take out dealer finance.

Pros of a car loan pre-approval

  • A fixed budget to shop with
  • Faster buying process
  • Less chance of getting a dodgy deal
  • Greater negotiating power (on car and interest rate)

Bear in mind too that you aren’t locked into any one lender after they’ve pre-approved you. If you aren’t happy with the limit you’ve been set, then you can try talking to another.

What are the drawbacks?

First and foremost, pre-approval isn’t available to everyone. After looking at your history and credit score, some lenders might not deem you an acceptable customer for pre-approval, which can be demoralising.

Let’s say you do qualify for pre-approval though – what could be bad about knowing that you’ve been approved for a certain amount? Well, for one thing, that amount might not be enough for the car you had your heart set on, and can lock you into a certain subset of vehicles (unless you decide to get a loan from a different provider, which you’re entitled to do).

Pre-approval also doesn’t last forever. The industry standard length is between one and three months, with three being the most common. There are plenty of lenders who only offer pre-approval for one month, although in some cases you’ll be able to renew it a further 30 days.

Cons of a car loan pre-approval

  • Not available from every lender
  • Not available for every car – some cars over a certain age won’t qualify
  • You’ll have a limited time to choose a car. Some people like to take their time before committing to such a big financial decision
  • You could be disappointed with the amount of money you’re able to borrow

How to get pre-approved for a car

Applying for pre-approval is actually no more complicated than applying for a standard car loan; it’s just a matter of finding a lender that offers it. You’ll find that most lenders today offer pre-approval to customers, so you definitely aren’t short on options – just ask your lender if they allow it before proceeding or check online.

To get a pre-approved car loan, you can follow these steps:

  1. Compare car loan providers to make sure you’ve found the right one: Don’t choose a car loan just because it offers pre-approval. Check that it is competitive on rates, fees and flexible features.
  2. Check your credit rating before applying: You can visit sites like Equifax and Experian to get a free check of your credit score, which shows how trustworthy you are as a borrower. If your score’s too low, then you might not qualify for pre-approval with most reputable lenders.
  3. Gather all of the necessary documents you’d need when applying for a car loan: 100 points of ID, proof of your employment and income as well as a list of your assets and liabilities will all be necessary for the application process.
  4. Contact your chosen lender and tell them you want to apply for pre-approval: Some online lenders can grant pre-approval within 60 seconds (or so they say)

Once you’ve been pre-approved, the next step is to then go and shop for your new wheels. It won’t always be as quick as reading those four dot points, but it can really be that simple if everything goes to plan.

Who offers pre-approved car loans?

There are heaps of lenders that offer pre-approval for both new and used car loans.

Well over half of the car loan providers on the market offer pre-approval, so get out there and start comparing them.’s two cents

If you’ve proven yourself to be a trustworthy borrower or have some solid saving and spending habits, then there’s no reason why you can’t go for pre-approval. Doing so could save you time spent on back and forths at the dealership.

In terms of money saved, you might find yourself much less likely to splurge on a car you can’t really afford if you’ve been pre-approved. If you were to be pre-approved for $20,000 worth, then you wouldn’t bother trying to get that $50,000 beamer that’s front and centre in the display, and your savings account would thank you for it.

William Jolly
William Jolly joined as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.
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