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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.

Car loan pre-approval can give you a better idea of what cars you can afford, so finding a car loan that offers online pre-approval can make the process of buying a car much easier.

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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 you finance at an even lower rate. Just make sure you take into account all other costs too (like car loan fees) before you agree to either dealer finance or a loan. 

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 of car loan pre-approval?

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

Should you get pre-approved for a car loan?

You don’t need to get pre-approved for a car loan, but it can be very beneficial when buying a car. Pre-approval can simplify the car buying process if you aren’t buying the car outright, as it provides two purposes:

• It can give you an idea of how much a lender is willing to lend you before you start buying a car; and
• It can shorten the car loan application process, as a lender will already know if you’re trustworthy as a borrower

If a lender pre-approves you for a car loan of $30,000, you then know you can have an upper limit of $30,000 when searching for your new set of wheels. Of course, this might limit you from getting your dream car, but it can stop you from wasting your time applying for a loan only to be rejected at the eleventh hour.

Car loan pre-approval can simply give you a clearer picture as to what you can and can't afford to borrow.

How to get pre-approved for a car loan online

Getting approved for a car loan online sounds tricky, but it can actually be a pretty easy and streamlined process, as most lenders have some pretty sophisticated pre-approval systems on their websites nowadays. It does take a bit of preparation on your behalf though, and to increase your chances of receiving pre-approval quickly you should come prepared.

Make sure you do the following before applying for online car loan pre-approval:

• Check your credit score: Your credit score is a number used by lenders to assess your trustworthiness as a borrower, and you should know if it’s high enough to be successfully pre-approved before you apply, as a rejection could show up on your credit history. Learn more about how to check your credit score.
• Get all your supporting documents together: In addition to knowing your credit score, you’ll also need to provide a slew of financial documents to the lender. These documents include things like 100 points of ID (Driver’s license, passport etc.), recent pay slips, a copy of your bank statements, your current employment status, list of any other assets and liabilities you might have (like shares, other loans or credit card debts) and more.
• Have a shortlist of cars at the ready: You only have between one and three months to purchase your car before the loan pre-approval runs out, so it might work in your favour to have a shortlist of cars you want to buy already to show the lender. Even if they don’t require one, this will still help you complete your purchase and therefore your loan application before your pre-approval expires.
• Compare a wide range of lenders: Before jumping into applying, you should definitely compare a range of different lenders on their interest rates, fees and other loan features, such as whether they offer balloon payments or repayment flexibility. You should also do some research on the pre-approval process they offer, like whether it has to be done quickly online or over the phone.
• Contact the lender: Once you’ve done all this, contact your lender or jump onto their online pre-approval tool to get started. If you’ve done the prior four steps, then successfully obtaining pre-approval should only take a matter of minutes.

How long does an auto loan pre-approval take?

Getting car loan pre-approval online now doesn’t take much time at all. Although it can differ based on the lender, a fast turnaround time for pre-approval is one that’s completed on the same day, sometimes giving you an answer within minutes of completing the application. A more standard time for car loan pre-approval is to get final approval within one or two days, but if you find a lender with a more up-to-date online approval system, it’ll often be much less than this.

The usual car loan application time from start to finish can often take several days, so by getting pre-approved car finance, you can shave a significant amount of time off the overall process.

How long do pre-approvals last?

In the majority of cases, pre-approvals don’t last forever. Although this can differ between lenders, they’re usually valid for a limited period of time. The industry-standard length for a car loan pre-approval is between one and three months. Three is more common, but there are plenty of lenders out there who will only offer pre-approval for one-month.

Once the pre-approval expires, you’ll have to speak to the lender about being re-approved again, which will often give you another 30 days to complete your purchase. But if you’re serious about buying a car, one to three months should be plenty of time to find the right model.

What happens after a pre-approval?

Once you’ve been pre-approved, you now need to go out and actually purchase the car. You can buy a car either through a dealership, auction or a private seller - the lender will just need to know this information because once the purchase of the car has been approved, your lender will then contact the seller to get an invoice for the vehicle.

They will then do a final assessment of the purchase, and give you final approval, at which point you will need to sign and return a copy of the loan contract. Once this is done, the lender will pay the funds to the dealership or seller directly. But be aware: this only works if the purchase is within the pre-approved limit set by the lender.

If you buy a car that’s outside the pre-approved limit, you may need to complete an entirely new application.

What if your loan is declined after a pre-approval?

A pre-approval isn’t a guarantee of being given a loan by a lender, as there are a number of reasons why they might reject you after the fact. Some of the more common reasons include:

• The car you’re buying is outside the pre-approved range
• There’s a change in your personal circumstances, such as a reduced wage, a lost job, large expenditure on certain things (like gambling), multiple other credit applications in the meantime and more.
• Interest rates have changed during the pre-approval period, meaning your ability to repay the loan could have changed;
• The lender might have since modified its lending policy, meaning you will have to be re-assessed under the new terms.

The important thing to know is you shouldn’t immediately re-apply for a loan without first speaking to the lender to ask why you were rejected. This is because a rejected loan application can negatively impact your credit history, so you don’t want to apply again only to be rejected again.

Make sure you contact the lender to find out why your loan was rejected. If it’s for a minor reason like a change of loan terms, then you might be able to reapply. But if it’s for a different reason, like a change in your income or higher interest rates, then you might need to consider applying for a loan with a different lender.