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Car Loan Pre-Qualification vs. Pre-Approval: What is the Difference?
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.
Different lenders can use industry terms in slightly different ways. So, when shopping for a car loan, make sure you understand what the lender you’re speaking to means by the terms they use. In some cases, pre-qualified car loans will involve the lender verifying income and debts. (That’s what SCCU and many other lenders refer to as part of pre-approving car loans.)
How Credit Scores Work
Each person has credit scores that a lender can refer to when making a lending decision. The scores are calculated by the relevant credit bureaus; each bureau/agency uses credit-related information submitted by lenders as inputs into their algorithm. The result: a person’s current credit score. You can check your credit reports for free with each of the three bureaus every 12 months at annualcreditreport.com.
The scoring rubric, using the FICO® score as our example, can include scores that range from 300 to 850. Numbers fall into five categories that indicate to lenders how likely it is that the borrower would pay back their debt:
- Exceptional (800-850): Lenders will most likely approve borrowers with a credit score in this range and will most likely offer them a low interest rate.
- Very Good (740-799): This is another low-risk range for credit scores.
- Good (670-739): This is a category where most lenders would be willing to loan money if the borrower meets other qualifications.
- Fair (580-669): This is below average but better than the “poor” rating. A lender may charge a higher interest rate if they approve this loan.
- Poor (under 580): This is well below average and would indicate to a lender that this borrower is a risky one.
At SCCU, you can check your FICO® score for free in your Online Banking account or in the Mobile app. If you’d like to build or improve your credit, check out this article.
As part of a pre-qualification, a lender may do a soft credit check to get the big picture of how creditworthy the borrower is. In a pre-approval process, the lender would check a borrower’s credit score with a hard pull to see how the score fits within their guidelines.
During a pre-approval process, a score that falls within the lender’s range for approval is a good sign. Does pre-approval guarantee a car loan? No, but it makes it much more likely. Here’s where you can apply for an auto loan pre-approval.
Shopping for a Vehicle
Once you have a car loan pre-approval from your lender, you can shop for your vehicle of choice with more confidence and make more informed buying decisions. With a down payment, you can purchase a vehicle with a price point that equals what you were approved for and what cash you have to put down.
We’ll use the example from above:
- Current monthly debt payments: $950
- Mortgage: $700
- Credit cards: $100
- Personal loan: $150
- Pre-approved for $25,000
If you had $5,000 set aside for a down payment, you could now shop in the $30,000 range;
The example above doesn’t list a current car payment. In some cases, borrowers own a vehicle they can trade in to help with the down payment.
Estimate Your Vehicle Payment¹
"I purchased a vehicle very recently and SCCU had the BEST interest rate of all other financial institutions."Mike V.
Applying for a Car Loan
A car loan is a secured personal loan with the vehicle serving as collateral. The lender approves the loan and issues funds while the borrower agrees to make payments under the agreed upon term and conditions. The loan funds, combined with any down payment, will cover the cost of the vehicle (paying off the seller) and then the borrower will make regular payments over the established time period to pay the lender back.
With pre-approved car loans, you’ll know how much you can borrow and likely get approved by the lender providing the pre-approval. You’ll want to also be clear, though, about the other aspects of the car loan you choose.
As a borrower, you’ll sign an agreement (a “note”) that describes in detail how much you’ve borrowed; the term length—meaning the time period in which you’ll make payments; the interest rate and annual percentage rate; insurance requirements; any lender fees; whether there is a pre-payment penalty for early payments and/or pay-offs; and so forth.
It’s important to read and understand the terms and conditions of a car loan before signing the agreement. If you have questions about SCCU loan programs, just contact us and we’ll share the details.
Interest Rates Versus Annual Percentage Rates (APRs)
In our discussion about car loan terms and conditions, we mentioned both interest rates and APRs. Although they are similar, there is an important difference. Typically, in casual conversation, someone might say they’re paying 6% on their car loan. This is the interest rate, most likely, the lender is charging.
For a true comparison among loan programs, though, you’ll want to look at the APR. This factors in any additional fees charged with the loan; comparing them allows you to more accurately understand the cost of borrowing among different loan programs.
Principal and Interest Payments
Let’s break down the parts of a car payment:
- Principal, which is the part of the payment that will go towards reducing the balance you currently own on the loan
- Interest, which is the portion of the payment that goes towards the lender.
To determine how much you’ll owe each month, you’ll need to know how much you’ll borrow and for what length of time. You can use our car loan financial calculators. At SCCU, the shorter the term, the lower the interest rate is typically charged.
We’re going to continue with our theoretical example where you’re borrowing $25,000. We’re going to use a series of rates and terms that are accurate at the time of writing this article.
|Payment Period||Purchase APR* "As Low As"||Minimum Loan Amount||Payment per $1,000|
|Up to 36 Months||6.24%||No minimum loan amount||$30.53|
|Up to 48 Months||6.49%||No minimum loan amount||$23.71|
|Up to 60 Months||6.74%||$10,000||$19.68|
|Up to 66 Months||6.99%||$10,000||$18.29|
|Up to 72 Months||7.24%||$12,000||$17.16|
|Up to 75 Months||7.49%||$15,000||$16.74|
|Up to 78 Months||7.99%||$20,000||$16.48|
|Up to 84 Months||8.24%||$25,000||$15.71|
Rates shown are fixed Annual Percentage Rates for vehicle model years 2023 and newer. Rates are subject to change. Your actual rate and terms are affected by your creditworthiness, term selected, vehicle type, and model year. Certain restrictions apply. You may be asked to furnish a down payment. Florida loans are subject to Documentary Stamp Tax. The tax amount is not included in the quoted APR.
Total monthly payments for an auto loan of $25,000 would be:
- 60 months at 5.24% APR*: $474.53
- 66 months at 5.39% APR*:: $438.55
- 72 months at 5.54% APR*:: $408.92
- 75 months at 6.09% APR*:: $401.62
- 78 months at 6.39% APR*:: $392.51
- 84 months at 6.79% APR*:: $374.76
In our example, the borrower could qualify for a principal and interest payment of $490. So, any of these options would work for that person, so they’d have to decide what would be most comfortable for their budget. In other instances—let’s say one where a person qualified for $400 a month—they could choose between the 78 or 84 months. (If they could put more money down, then they could qualify for more options.)
As an overview on the subject, the shorter the term, the higher the payment with less being paid back on the loan overall. The longer the term, the lower the payment with more being paid on the loan overall. You can find a more detailed example here that allows you to see the pros and cons of shorter and longer car loan terms. In this example, we compared a 60-month and a 72-month auto loan.
Be clear about whether or not your lender would charge a pre-payment penalty for paying early (SCCU does not). If they do, then any money you pay beyond your typical principal and interest payment could trigger a penalty. So, you could end up paying more on the pre-payment penalties than what you could be saving on interest.
Because, we don’t charge these penalties at SCCU, you may decide to take a longer term and then pay more than your regular car payment when possible: when your budget allows, for example, or when you get a work bonus or receive an unexpected sum of money.
So, if needed, you could go with a longer term to benefit from the lower monthly car payment. Then, as you’re able, you can put more funds on the loan, saving yourself interest with no penalties involved.
Why Choose SCCU as Your Car Loan Lender
Just like you’ll shop for a new vehicle, you’ll likely need to shop for a lender.
At SCCU, we make it easy to request car loan pre-approvals. With your pre-approval, you can then go shopping with confidence. The auto loan pre-approval is good for thirty days. If that time has expired and you’re still shopping, please contact us to extend the pre-approval. (If, on the other hand, you decide not to go through with the car loan, just contact us to cancel the pre-approval.) Then, once you find the right vehicle, have the dealer send the buyer’s order to us by fax or email. Then, SCCU will be in contact with you to finalize the loan.
To make the process even easier, you don’t need to be a credit union member beforehand to request a pre-approval or apply for a car loan. When you qualify for a loan, then we’ll simply process the application for the car loan and SCCU membership application together. (As long as you live or work in any of these counties, you can become a member with a $5 deposit in a savings account.)
Additional benefits of choosing SCCU for your car loan include the following:
- Fast approval decisions; we make our lending decisions locally
- Simple electronic closing; we use Express Sign
- Low auto interest rates8 for both new and used vehicles
- Flexible terms9
- No application fees
Plus, if you find the ideal car at a dealership, you can request SCCU financing; apply at the dealership where you’re already located; and have the dealer submit it to SCCU for fast approval.
While we’ve focused on the steps to take when purchasing a car, we also offer car refinancing programs where you won’t have an application fee or pre-payment penalty when you take advantage of our competitive interest rates and payments.
If you’re interested in recreational vehicles, we loan on those as well, offering:
You can find more information about car loans in our vehicle buying center.
APR = Annual Percentage Rate
¹CALCULATOR: The information provided by these calculators is intended for illustrative purposes only and is not intended to purport actual user-defined parameters. The default figures shown are hypothetical and may not be applicable to your individual situation. Be sure to consult a financial professional prior to relying on the results.
²TERMS: Terms available up to 84 months for auto loan purchases and auto loan refinances, up to 240 months for boat and RV loan purchases, and up to 72 months for motorcycle loan purchases and are based on your credit quality, vehicle type, model, and year. Our usual credit criteria apply. Your term may be different. Qualified borrowers only.
³RATES: Rates are subject to change. Rates shown are fixed Annual Percentage Rates and are affected by your credit quality, model year, term selected, loan-to-value (LTV), and payment method. Your rate may be different. Qualified borrowers only. Our usual credit criteria apply. You may be asked to furnish a down payment. Rates shown for auto purchases/auto refinances are fixed Annual Percentage Rates for vehicle model years 2023 and newer. Rates shown for motorcycle purchases are fixed Annual Percentage Rates for vehicle model years 2020-2024. Florida loans are subject to Documentary Stamp Tax. The tax amount is not included in the quoted APR.