When preparing to make a new or used car purchase, most shoppers will need a car loan to pay for it. Before starting to shop, you’ll want to get a car loan pre-approval, so you know you can get the loan you need for the vehicle you want.
Getting a car loan pre-approval can be time-consuming and require digging deep into your recent financial history so lenders trust you will repay the loan.
This can lead to a lot of stress for some car buyers. Fortunately, the process has become simpler as many lenders offer online application processes, and many car dealerships even allow you to complete the process online before setting foot in a showroom.
To help make the process even more streamlined, we'll outline what lenders will require to get a car loan pre-approval, where to apply, and more.
Get a Car Loan Pre-Approval
There are several ways to get a car loan pre-approval: at a bank, credit union, online lender, or a car dealership. We'll cover these and other key steps to getting pre-approved below.
Check Your Credit Report and Credit Score
No matter where you go to get your pre-approval, you’ll first want to check your credit history and credit score to ensure it's good enough to get approved. If your score is too low, it's best to know upfront and start working to improve your credit before wasting time having your car loan application rejected.
There are several places you can obtain a free credit score and credit report to get an idea of where you stand. These include any of the three major credit bureaus: Transunion, Experian, or Equifax. You can also get it from a third-party site like Credit Karma or Borrowell.
When checking your credit score, ensure the company pulling your score only does a soft credit inquiry and not a hard inquiry. A soft inquiry may show on your credit report but has no impact on your credit score. A hard credit inquiry can result in a small decrease in your credit score.
Likely the most accurate of the group will be Equifax, as it uses the FICO scoring model, which most auto lenders use. However, even that won't always align perfectly with the score the lender will see, as there are multiple FICO scoring models a lender can use.
Checking and Understanding Your Credit Score
To check your credit score, log onto one of the above sites and follow the prompts for how to get your free credit score and report.
Once you have obtained your credit score, compare it to the scoring categories to see where you stand. Your FICO score will range from 300 to 900, and the scoring categories are as follows:
- 800 and higher: Exceptional credit
- 720 to 799: Very good credit
- 640 to 719: Good credit
- 580 to 639: Fair credit
- 579 and lower: Poor credit
With a score of 800 or higher, you're a prime credit candidate. This means you will have access to the best loan terms and lowest interest rates.
If your credit score is between 720 and 799, you are still a top-level borrower and will have access to many loan options and low interest rates.
At 640 to 719, you likely have a great payment history but may have significant debt on your credit report, which makes you a slightly higher credit risk. In this case, you will still have plenty of loan options, but the lenders may set higher interest rates.
From 580 to 639, you fall into the subprime borrower category. You will still have some loan options at this point, but the interest rates will be significantly higher, and the loan terms will likely be shorter. This can lead to higher monthly payments.
At a 579 or lower, you are a deep subprime borrower and will likely struggle to find a car loan. Some lenders specialize in bad credit car loans, but the interest rates could be in the double digits.
Another Way your Credit History Affects a Car Loan
Your credit score is only half of the approval process. Lenders will also look into your credit history to determine trends and other potential hidden risks.
Your debt-to-income (DTI) ratio has no impact on your credit score but plays a critical role in deciding if you can receive a car loan pre-approval. Your DTI ratio is your total debt payments per month divided by your net -- pre-tax -- income and is expressed as a percentage.
For example, if you earn $5,000 per month,have minimum monthly credit card payments totalling $100, and a $150-per-month personal loan, you'd have a 5% DTI ratio ($250 / $5,000 = 0.05).
In Canada, a good DTI ratio is 36% or less, and any lender will approve you at this point. At 37 to 42%, you have a manageable DTI ratio, and most lenders will approve you, though you may get a slightly higher interest rate. At 43 to 49%, it's a cause for concern, but some lenders will still approve you with a higher interest rate and additional conditions. With a DTI of 50% or higher, most lenders will reject you.
Where to Apply for a Car Loan Pre-Approval
When you are ready to apply for a car loan pre-approval, there are several avenues you can take.
At the Dealership
One of the most streamlined ways to apply for a car loan pre-approval is at the car dealership while car shopping. This is simple because the dealer can apply to multiple lenders at once and get you numerous financing options with varying interest rates and loan payments.
The dealership also knows what new cars or used cars fall within your pre-approval. They can also easily figure your trade-in value into the equation to help improve the odds of being pre-approved.
Dealerships can also often work an extended warranty and GAP insurance into the loan.
In some cases, you can even apply for a car loan pre-approval on the dealership's website without setting foot in the dealership.
At Clutch, we are a 100% online car retailer, so our entire car-buying process is online, including the loan application and pre-qualification. The Clutch online car loan pre-qualification takes only two minutes to complete, and you'll have an answer within 24 hours. Plus, there's no impact on your credit score.
At a Traditional Bank
You can also apply for an auto loan pre-approval at a traditional bank. You can visit the bank in person and fill out a credit application, but some banks also offer online loan applications.
Simply fill out the credit application online or in person, and the bank will check your credit. If you have a satisfactory credit score and DTI ratio, the bank will provide you with a pre-approval letter you can take to the dealership for financing.
In some cases, the bank will give you a cheque you can fill out for up to the amount you're pre-approved for. You can take this cheque along with the loan terms to the dealership to purchase your vehicle. In some cases, these terms will include a required down payment amount or percentage.
At an Online Lender
Online lenders are loan specialists with no physical branches for you to visit. In some cases, they offer only car loans, but many offer a wide range of personal loans and other lending options.
Like a bank or credit union, after filling out a loan pre-approval application, the lender will either issue you a pre-approval letter or mail you a physical cheque you can make out for a new or pre-owned vehicle up to the maximum loan amount.
The benefits of using an online lender include lower loan fees and interest rates due to their reduced overhead expenses. Also, some online lenders specialize in bad credit auto loans for those struggling to get approved for car financing.
Watch Out for Phantom Approvals
Beware that some online lenders and dealerships will tell customers they are approved for a car loan before viewing their credit. They will then submit your credit to multiple lenders who each perform a hard credit inquiry.
While rate shopping — submitting your credit to multiple lenders at once for a specific purpose won’t count as multiple inquiries as it relates to your credit score. However, each inquiry will show on your credit report, which may be a red flag to some lenders.
What You Need to Get a Car Loan Pre-Approval
While every lender will have different documentation requirements for car loan pre-approvals, you should always have certain documents on hand when applying for car loans.
Proof of Income
The lender must verify you can afford the loan you're applying for, so they may need proof of income, especially if you’re self-employed or are a subprime borrower. You can prove this with pay stubs or your bank account statements, but always have at least three months of pay records on hand.
Driver's Licence and Supplemental ID
The lender will also need to verify you are who you claim to be and you live where you claim to. You can do so with your government-issued driver's licence.
Some lenders may also require a second form of identification, such as a utility bill, a mortgage statement, or a lease agreement.
Consent to a Credit Check
Finally, you must agree to a credit check. Many lenders will include a form in the application process that satisfies this requirement.
Clutch's Pre-Qualification Streamlines the Process
Clutch's car loan pre-qualification process makes qualifying for a car loan even easier than most lenders. Our two-minute online application requires no physical documentation. Simply choose the type of pre-owned vehicle you want, your payment budget, estimated credit score, the timeframe you plan on buying a car, your contact information, and your address.
This is on top of our already streamlined online car-buying experience. At Clutch, you choose and agree to purchase your vehicle online, and we deliver it to you and complete the process at your home. We also offer a 10-day test-own process where you can keep the vehicle for up to 10 days for a test drive and return it or exchange it for another vehicle if you don't like it.
Plus, you can rest assured our entire pre-owned vehicle inventory is in top shape, as they endure a rigorous 210-point inspection before we put them into our inventory. We then back up all vehicles sold online with a 90-day or 6,000-km warranty.
