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What is a pre-approved car loan

Vidhu Bajaj avatar
Vidhu Bajaj
- 7 min read
What is a pre-approved car loan

Many Aussies set their sights on the car they want to buy before applying for a car loan, but it could be disappointing to find out that a lender won't let you borrow enough to buy the car of your choice. This is where getting pre-approved for a car loan could make a difference. 

What is car loan pre-approval

Car loan pre-approval is a process in which a lender reviews your financial information and agrees, in principle, to lend you a certain sum of money for your car purchase. Applying for pre-approval before finalising your choice of wheels could provide you with a realistic budget to work with. This makes narrowing down your options while shopping easier and prevents overspending.

Further, a pre-approval could enhance your bargaining power when negotiating the car's price with the seller. Sellers often view pre-approved buyers as serious shoppers with pre-determined budgets, and they might be more inclined to provide them with the best possible deals to close the sale successfully.

How does getting pre-approved for a car loan work

Getting pre-approved for a car loan involves some of the checks that are conducted before a car loan is completely approved. You'll often need to submit identity documents, as well as bank documents or payslips, to prove you have the income to repay the loan. Also, the lender will most likely do a credit score check. If the lender is satisfied that you are likely to repay the loan, they will offer pre-approval, which is a conditional consent to the loan that is usually valid for a few months.

Once pre-approved, you will need to shortlist a car within the timeframe specified by the lender and apply for the car loan. The lender will check that the selected car meets their lending criteria and also confirm that the information provided for your pre-approval hasn't changed significantly.

For instance, if you are buying a used car with a pre-approved loan, some lenders may insist that it's no older than seven years. Again, if you have lost your job or your business income has shrunk, the lender may require you to explain how you plan to make up for the lost income before approving your car loan.

How to get pre-approved for a car loan?

Depending on the lender you choose, you may be able to apply for a car loan pre-approval online, over the phone, or in person. Irrespective of the method you choose, you'll need to have all the documents and financial information readily available.

Also, it may be useful to do some homework before getting started on the car loan pre-approval process. You can research the type of car you want to buy and estimate its cost and any additional expenses, including stamp duty, registration, and insurance costs. Through this exercise, you'll be able to estimate how much you need to borrow. Keep in mind that you'll have to pay for operating the car as well.

Here's a step-by-step guide on how to get car loan pre-approval:

1. Compare lenders

Compare your options from various lenders to select the best possible deal for you and your situation. While it's natural to compare interest rates on loans, it could also be worth considering the fees charged by the lender and the features on offer to secure a competitive deal.

2. Check your eligibility

Make sure you meet the lender's eligibility criteria to reduce the chances of rejection. You'll typically need to be at least 18 years or older, an Australian citizen or permanent resident, and have a stable income to potentially qualify for a loan.

Additionally, consider checking your credit score before putting in an application. Your credit score gives lenders an indication of your creditworthiness, helping them decide whether to offer you a loan and, if yes, at what rate.

Checking your credit score before applying for a loan could give you an idea about how lenders will view your application, and if you need to take some time to improve your credit score before applying.

3. Gather the necessary documents

When applying for a car loan, you'll need to provide various documents to demonstrate your ability to repay the loan. These typically include:

  • Proof of identity (such as a passport and a driver's licence).
  • Residence proof, which could be in the form of a utility bill, tenancy agreement or mortgage statement.
  • Income proofs, like payslips, bank statements, or tax returns.
  • Proofs of savings, investments and liabilities. These may include bank statements, credit card bills, and other debt-related documentation.

4. Apply for pre-approval

Once your documentation is ready, submit your loan application online or in person, depending on your lender's requirements. Now, sit back and relax. It could take a lender a few working days to assess your financial information and credit history before approving your application for pre-approval.

How does getting pre-approved for a car loan affect your credit score?

Whenever you authorise a lender to request a copy of your credit report, the inquiry is listed in your report by the credit reporting agencies. If you end up registering too many queries in a short while, it can affect your credit score negatively.

Note that some lenders may offer a car loan pre-approval without a credit check, especially if you apply online. Unfortunately, this doesn't accurately present your financial situation, and, as a result, the pre-approved loan amount may differ significantly from the sum that's finally approved.

What are the pros and cons of pre-approved car loans

Getting pre-approved for a car loan is optional. You could choose to skip this step and directly apply for a car loan. It could help to understand the potential benefits of a pre-approved car loan to make an informed choice.

Some of the advantages include:

  • It simplifies searching for a car by helping specify a suitable price range.
  • It gives you the confidence of knowing you can get a car loan before you begin looking.
  • It may help with negotiations with car dealers as you don't need to depend on them for financing options.

At the same time, there are these disadvantages to consider:

  • You can get pre-approved car loans from just a few lenders, which means you may not have the option of holding out for better loan terms.
  • Pre-approvals involve a credit score check, which means they will be recorded as an inquiry in your credit report.
  • Pre-approvals don't last very long, which means you may have to find a suitable car faster.

What happens after pre-approval?

Once you're pre-approved, you should confirm how long you have to find a car before the pre-approval expires. This may determine how you approach your car search. It's worth asking if there are any additional steps or requirements to move from pre-approval to approval, as this can vary between lenders.

With pre-approval and a suitable car in mind, you're ready for the actual loan application. Ensure that the car you've selected meets the lender's eligibility criteria. This may require you to carefully look at details like the car's age, mileage, make and model while shopping.

Does getting pre-approved guarantee final loan approval?

It’s crucial to remember that a loan pre-approval is just a conditional approval. When you apply for pre-approval, the lender reviews your financial situation and approves you for a loan in principle. However, getting pre-approved for a loan isn't a guarantee that you'll be finally approved for it.

The lender will review your financial and credit history once again before finalising the loan. Some lenders may also have conditions regarding the type of vehicle you can buy or the car's age if you're buying a used one. If your selected model doesn't meet these criteria, the lender may not approve your loan.

Further, it’s worth noting that not all lenders may offer pre-approved car loans, potentially narrowing down your options. However, you can still use online calculators to get a general idea about your borrowing capacity based on affordable repayments according to your financial situation. With the help of these tools, you can better estimate your potential monthly payments and choose a loan that aligns with your financial goals.


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Product database updated 27 May, 2024

This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.