How do car loan pre-approvals work?

If you’re on the hunt for a new car and choose to finance it with a car loan, having pre-approval for that loan could help speed up the process.

Buying a car, while exciting, can be stressful when it comes to organising your finances. If you don’t have the savings to pay for your new car in cash, you may decide to take out a car loan. This can be a complex process in some situations, but getting pre-approval for your loan could take some of the pressure off, help you negotiate with the car dealer and keep you aware of your budget limitations.

So, what is car loan pre-approval, which lenders offer it and how can you get it? Let’s break it down.

What is car loan pre-approval?

A car loan pre-approval is when your lender agrees in principle to give you a loan to buy a car before you buy it. Similar to other loan application processes, the lender will typically evaluate your financial circumstances to ascertain how much you can afford to borrow.

A pre-approval could give you a better idea of your price range before you walk into the car dealership or jump online. It could also help you avoid spending more than you can afford.

It’s important to note that a pre-approval doesn’t mean the loan is a guarantee. This is because the lender has only granted you conditional approval, where you are accepted in principle for a loan up to a certain amount.

However, your lender may not accept the loan for all vehicle types and once you know what you want to buy, you will most likely have to submit a full car loan application.

Unconditional approval is the next step after your loan application has been successfully reviewed. It means the lender is prepared to give you a loan for a specific amount for a specific vehicle.

Car loan pre-approvals in Australia are usually only valid for a limited time, generally ranging from one to three months.

Given this time limit, it may be helpful to have done some research and be ready to start the car hunt as soon as you have the pre-approval.

Car loans with pre-approval available

Below is a snapshot of car loans on Canstar’s database with pre-approval available before a full application is made.

The table below displays some of the car loans with pre-approval available on Canstar’s database, with links to providers’ websites. This table is sorted by advertised interest rate (lowest to highest), then by provider name (alphabetically). The products are based on car loans available for $20,000, for new cars paid over five years in NSW. Read the Comparison Rate Warning.

How do I get pre-approved for a car loan?

Depending on the lender you choose, you may be able to apply for car loan pre-approval online, over the phone or in a branch. Generally, obtaining pre-approval involves similar steps to applying for full approval on a car loan.

These steps could include:

  1. Check your credit rating before you put in an application. Your credit rating or credit score is a number that gives lenders an indication of how trustworthy you are likely to be as a borrower, and many lenders in Australia use credit scores to help them assess loan applications.
  2. Gathering all the necessary documents and personal details for a loan application. This could include proof of identity (100 points of ID) and proof of your ability to make repayments (through income, assets and liabilities such as credit cards or other loans).
  3. Comparing your options to help ensure you get a good deal on a loan that suits your financial situation. It could be worth looking at the interest rate and fees for any loans you’re considering, as well as the features on offer (such as flexibility in how you make repayments).
  4. Getting in touch with the lender you wish to apply for pre-approval with. Note that as well as potentially checking your credit score, the lender may wish to get in touch with people such as your employer, other lenders you’ve borrowed from in the past or previous property managers to verify the information you provided.
  5. If you’re pre-approved, start shopping around for your dream car.

Pros and cons of car loan pre-approval

As with any financial decision, a car loan pre-approval can have benefits and drawbacks. Here are some of the potential pros and cons to consider:

Pros of car loan pre-approval

  • It can help you understand your price range and make an offer on a car with confidence.
  • It can prevent you from being pushed into spending more than you can afford.
  • It can remove the need to negotiate loan terms with a car salesperson as the finance is already lined up.

Cons of car loan pre-approval

  • It is usually only valid for a limited time.
  • Not all lenders offer pre-approval for car loans, so you’ll need to do some research.
  • Could involve the lender doing a credit check, which may be recorded on your credit report and visible to lenders you apply to in the future. Multiple loan applications on your credit record in a short space of time could be viewed negatively by lenders.

This article was reviewed by our Sub-editor Tom Letts and Finance Editor Sean Callery before it was updated, as part of our fact-checking process.

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