“Congratulations! Because you’ve worked so hard to keep your credit history pristine, you’re prequalified to apply for a loan of up to $XX,XXX!”
Now before you get all excited, as good as that sounds, it doesn’t mean you’re guaranteed a loan. It just means they think you’ll be a good customer and they’re trying to rope you in.
Here’s the difference between car loan pre-qualification and pre-approval.
What Exactly Is Pre-Qualified Then?
Basically, pre-qualified means your credit score indicates you’re probably a safe bet and the company would like an opportunity to review your credit application to determine if your outside appearance is substantiated.
They have usually done a soft inquiry of your credit history to find you. When you respond to the offer, a more thorough inquiry will be conducted to confirm your creditworthiness. However, a pre-qualification is not a loan offer and should not be construed as such.
So, What Is Pre-Approval?
Pre-approval means they’re certain you’re a good risk and they’re making you a firm offer of a loan, right there on the spot. While this might seem to be a minor difference, the reality is you can do far more with a pre-approval than pre-qualification.
Now, with that said, you’ll note those pre-approval offers typically include language something to the effect of “You’ve been pre-approved for a loan up to a certain dollar amount.” They do this so they have room to dial that offer back if they decide you’re not the golden egg you looked to be when they found you on the list of prospective customers.
By law, the lender must give you the same terms they offered in the marketing message. However, they don’t have to offer you the maximum amount. So, if you’re looking for a particular car, it’s a good idea to run the pertinent numbers through a good car loan calculator to ensure the offer will cover the vehicle you’re considering.
Is There any Value to Pre-Qualification?
The most significant benefit of a pre-qualification is the knowledge your credit is pretty solid — without having to conduct a hard inquiry. After all, doing so can reduce your credit score.
So, if in fact you’re thinking of applying for a car loan, you’ll know submitting an application is probably worthwhile. Keep in mind though, your income will be verified and your most recent credit report will be considered before lenders determine the loan amount or actually write the loan.
What’s the Benefit of Pre-Approval?
Car-buying experts always advise seeking a pre-approved loan for the amount of the car you’re looking to buy. Having a loan in hand when you walk into a car dealership gives you more leverage during the negotiation process.
You’ll already know the monthly payment on the amount you can afford to pay. Presumably you will have also shopped around for the best terms you can get. This gives you a frame of reference for making an informed comparison when the dealership offers to secure financing for your purchase.
If they come back with terms better than those you already have, you’re ahead of the game. Conversely, you can present your pre-approved offer after they make theirs and tell them you’ll take it if they can beat yours. Either way, you’ll get the best possible loan.
As you can see, the difference between car loan pre-qualification and pre-approval is quite significant. However, they do have one important thing in common. Getting an offer for either one is a pretty solid indicator your credit history looks good.
