Ready to get a new ride? You may like to get a good sense of what you can afford, and financial institutions like Space Coast Credit Union (SCCU) can help with that—by either pre-approving or pre-qualifying you for a certain dollar amount for the car loan. While these two processes function similarly, they differ in key ways—and we’ll compare and contrast the two here. Plus, we’ll walk you through how a car loan pre-approval process
works at SCCU.
Car Loan Approvals
To understand the differences between a car loan pre-qualification and a pre-approval, let’s take a look at the standard approval process. When it comes time to get a formal car loan approval
, a lender will consider these three pieces of financial information about the borrower:
- Minimum credit score
- Steady source of income
- Required debt-to-income ratio
Keep in mind that each lender may have somewhat different requirements.
When lenders either pre-qualify or pre-approve a borrower, they’ll use their underwriting standards as a guideline. For example, if a lender requires borrowers to have a credit score of 650 when it comes time to approving the car loan, that’s something they’d look for before pre-approving a borrower. (After all, the main goal of a pre-approval is to help ensure the borrower will get the loan at that financial institution!)
For pre-qualifying and pre-approving alike, a lender would typically check to make sure that the borrower also has a reasonable amount of income. So then, what’s the difference?
Auto Loan Pre-Qualifications
When it comes down to it, pre-qualification is a simpler process where lenders will typically request the applicant’s annual income and debt amount. At this point, lenders will accept the information at face value without checking any of the data.
If they check your credit score at this point, they’ll do a soft credit pull (also known as a soft credit check or a soft inquiry). This soft pull won’t affect your credit scores (phew!) because it functions as a way to determine how much you could potentially qualify for when buying a car.
With this process, the lender hasn’t invested significant time, simply gathering enough information to create a financial snapshot of the borrower. Then they’ll provide the borrower with a general amount that they’d be likely to qualify for, usually based on a debt-to-income (DTI) ratio.
Here’s an example of how that could work:
- Annual income: $48,000
- Monthly income: $48,000/12 = $4,000
- Current monthly debt payments: $950
- Mortgage: $700
- Credit cards: $100
- Personal loan: $150
- Lender’s DTI percentage: 36%
So, what does all that mean? If you have an annual gross income of $48,000, then that’s a monthly gross income of $4,000. If you multiply that by the lender’s DTI ratio of 36 percent, you get $1,440. Now, subtract your current debts ($1,440 - $950 = $490), and the lender could tell you that you tentatively qualify for a car payment of $490.
Why tentatively? When it’s time for a more formal approval, they will likely verify your income and debts, and they’ll officially check your credit score to see if you can qualify for this payment amount.
So, how much of a car can you buy nowadays for $490 a month? Let’s take an interest rate of 6% APR* and a term of 60 months. In that scenario, you could qualify for a car loan amount (sales price minus down payment) of about $25,000.
This auto loan pre-qualification will provide you with guidance when car shopping although this information is not a guarantee that your loan would be approved.
Pre-Approved Car Loans
Now let’s look at pre-approved car loans and how they differ from pre-qualified ones. First, the pre-approval process involves more significant vetting of your financial situation, such as verifying the income and debt information that you’ve provided. So, sellers/dealerships/lenders take pre-approvals more seriously because they carry more weight than a pre-qualification. A pre-approval also provides a borrower with more financial credibility when shopping.
Plus, with auto loan pre-approvals, the lender will typically do a hard credit check/pull/inquiry, which will appear on your credit report and lower your scores. But not to worry, if you submit multiple applications for pre-approvals in a two-week period, credit scoring models typically will only treat all of these hard inquiries as one.