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When you’re financing a car, you can choose either a fixed-rate or a variable-rate loan. With fixed-rate loans, the interest rate remains the same over the life of the loan. Adjustable-rate car loans, on the other hand, have an interest rate that may change.

For many borrowers, it may be better to go with a fixed-rate car loan. An interest rate that remains the same is easier to budget for. Plus, you avoid the risk that the rate could rise, causing your loan to become more expensive. However, there are situations in which an adjustable-rate car loan can make sense.

Here’s what you need to know to help make the choice between a fixed vs. variable interest rate on a car loan.

Are Car Loans Fixed or Variable?

Most car loans are fixed-rate loans, meaning your rate and monthly payment remain the same over the life of the loan. Variable- or adjustable-rate car loans are less common but do exist, typically tied to an index like the prime rate — causing your payments to rise or fall with market changes.

How Do Fixed-Rate Car Loans Work?

Fixed-rate auto loans typically have a loan term between 36 and 84 months. During that period, the interest rate on the loan remains the same.

The average auto loan interest rate is 6.73% for new cars and 11.87% for used cars. The rate you pay may be lower or higher, depending on your credit score. Lenders largely calculate interest rates on your credit history. A high credit score indicates to a lender that you’ve responsibly managed and paid back debts. As a result, they may give you a lower interest rate.

Borrowers with poor credit scores are considered more of a risk. Lenders compensate for that risk by offering higher interest rates.

The interest rate on a car loan is often listed as an annual percentage rate (APR), which also includes loan fees. Because the fees are included, an APR on a car loan tends to be slightly higher than the interest rate, but it’s a more accurate representation of what a loan will cost you.

Recommended: Average Car Loan Interest Rate by Credit Score

Benefits of Fixed-Rate Loans

Advantages of fixed-rate loans include:

•   Availability: Fixed-rate loans are easy to come by and can be found through car dealerships, banks, credit unions, and online lenders. The more loan options you have to choose from, the better the chance that you’ll find one with a lower interest rate and favorable loan terms.

•   Stability: With a fixed interest rate, you know exactly how much you’ll pay over the life of a loan. Fixed-rate loans may be ideal for car loans with long terms, since the longer the term of a loan, the greater the risk that interest rates might rise.

Cons of Fixed-Rate Loans

There are also drawbacks to fixed-rate loans, such as:

•   Opportunity cost: A fixed-rate loan doesn’t allow you to take advantage of falling interest rates. However, if rates drop, you could explore the idea of car loan refinancing, which might help you get a lower interest rate on a new loan.

•   The fixed rate might be higher: A lender might charge a higher interest rate for a fixed-rate loan.

Recommended: Smarter Ways to Get a Car Loan

How Do Variable-Rate Car Loans Work?

Interest rates on variable loans can fluctuate. They’re often pegged to the lender’s prime rate, which is the rate lenders use to set interest rates for loans. If the prime rate changes, the interest rate on a variable loan may change as well.

What could cause the prime rate to change? Banks often use the federal funds rate to help set their prime rate. The Federal Reserve may raise or lower the federal funds rate in an effort to influence the economy. For example, the Fed might raise interest rates to help combat inflation, or lower interest rates to stimulate the economy.

Benefits of Variable-Rate Car Loans

These loans have some pros to consider, including:

•   Potentially lower rates: If the interest rates are lower when you take out a variable-rate loan, they might stay that way for a while. Repay your loan within that period, and you may never have to pay higher rates. And if interest rates fall, once your variable-rate loan readjusts, you may get a lower interest rate.

•   Capped rates: Some variable-rate loans have an interest rate cap. That means your interest rate can’t continue to rise without limit. If this cap is similar to the rate you’d get with a fixed-rate loan, a variable rate may be worth considering.

Cons of Variable-Rate Car Loans

Variable-rate loans also have disadvantages, such as:

•   Volatility: Interest rates are usually based on a lender’s prime rate. If that rate rises, you may end up paying more on your loan. Changing rates can be hard to plan for in your budget.

•   Initial rates may be fleeting: A lender may offer low introductory rates on a variable-rate loan to entice you, but those rates might not last for long. Once the introductory period is over, your interest rate may make a big jump up.

How to Choose the Right Car Loan for You

In addition to weighing the pros and cons outlined above for fixed vs. variable interest rate loans, you should also consider the following factors when choosing a car loan.

Loan Term

The longer the term of your loan, the greater the chance there is that interest rates could rise. A fixed-rate loan may be a better option for a loan with a longer repayment period.

Risk Tolerance

If you appreciate predictability and have a low tolerance for risk, a fixed-rate loan might be right for you. However, if you believe interest rates may fall, and you can live with the possible risk that they could rise, a variable-rate loan may be your choice. Just be sure to include some room in your budget in case rates go up.

Interest Rates

If you expect interest rates to climb in the near future, you’ll likely want to avoid a variable-rate auto loan and opt for a fixed-rate loan instead. However, if you think interest rates will soon fall, a variable-rate loan could save you money.

Recommended: Is Car Interest Tax Deductible?

The Takeaway

The choice between a fixed vs. variable interest rate auto loan is a personal one. Consider the benefits and drawbacks of each type of loan, along with your risk tolerance, to help decide which loan option is best for you.

The good news is that you typically don’t have to stick with the same car loan, especially if it’s costing you money. If you think you might qualify for a loan with a lower interest rate or you need to lower your monthly payment, you might consider refinancing your loan.

With car loan refinancing, you replace your old loan with a new loan that ideally has a lower interest rate or a different loan term that’s more favorable.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What’s the difference between fixed and variable rate loans?

Fixed-rate loans have an interest rate that stays the same over the life of the loan. Variable-rate loans have interest rates that may change periodically during the term of the loan, usually depending on whether the prime rate rises or falls.

How do I know if my loan is fixed or variable?

When you apply for a loan, the lender should tell you whether the interest rate is fixed or variable. If they don’t tell you, be sure to ask. This information will also be spelled out in your loan contract.

Are car loans fixed or variable rate?

Most car loans are fixed-rate loans. However, it is possible to find lenders that offer variable-rate loans.

Photo credit: iStock/Valerii Apetroaiei

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-038

The true cost of auto loan refinancing can include transaction fees and other potential charges. While you may save money in the long run if you refinance at a lower interest rate, there may still be some hidden costs involved in refinancing your car loan. Read the fine print before signing any loan agreement so you’re fully aware of what those fees are.

What Is Car Refinancing?

When you take out a loan to purchase a car with, you can refinance that loan at any time. Refinancing simply means that you take out a new loan to pay the remaining balance on the existing one, ideally at a lower interest rate.

Here’s an example with more detail. Let’s say you currently owe $10,000 with Star Car Loan Company and have decided to refinance with Moon Auto Lenders. Moon Auto will send $10,000 to Star Car to pay off your loan balance. Moon Auto will then take over the lien on your car. That means that if you can’t pay your new refinanced loan, Moon Auto can seize your car to cover what you owe. You’ll then start making monthly payments to Moon Auto until your loan is paid off (with interest).

The True Cost of Refinancing a Car

Although you may save money if you refinance your car loan, you need to find out first whether refinancing your car will cost money. Some lenders charge transfer, exit, and/or upfront fees that can reduce the money you might save with that lower interest rate.

Here are some potential charges to look for as you’re trying to figure out how much it may cost to refinance your car:

•   Early termination fee. Some lenders may charge you this fee if you pay your loan off early. See if your current lender has such a policy and, if so, how much it will cost you.

•   Transaction fee. Both your current and new lender may charge a processing or application fee. (Some new lenders may be willing to waive this fee, so ask.)

•   Late payment fee. If you make a late payment on your refinanced loan (or the current one, for that matter), your lender may charge a late payment fee.

•   Registration fee. Some states may require you to re-register your car when you refinance.

•   Title transfer fee. Some states may charge a title transfer fee as the title moves from your old lender to the new one.

If you owe more than your car is worth, it may be challenging to find a lender who will refinance your loan. Some lenders may be willing to do so with an upfront cash payment to make up for the difference between what your car is worth and the amount you’re borrowing.

While these various fees and costs may not be large, they can add up, so read the fine print so that you know what added expenses your car refinance could involve.

Pros and Cons of Car Refinancing

There are many pros and cons to refinancing a car. The biggest benefit is the potential cost savings you could get if you refinance at a lower interest rate, but there’s no guarantee you’ll get a lower rate.

Another benefit is that if you’re struggling to pay your monthly loan payments, you may be able to lower what you pay each month if you refinance for a longer period. The drawback here, however, is that you may not save in interest, since most car loans have higher interest rates for loan periods of 60 months or longer.

Another potential drawback is the fees. Some refinancing lenders charge fees, and that can add to the cost of refinancing your car loan.

Recommended: Can You Refinance a Car Loan With the Same Lender?

When to Consider Refinancing Your Car

Now let’s first talk about when to refinance a car.

Interest rates go up and down with the economy. If current car interest rates are lower than they were when you got your car loan, refinancing could save you money because you can likely get a lower rate now. Also, if your credit scores are now better than they were when you applied for your original loan, you may also qualify for lower rates.

These are both great opportunities to refinance your car loan.

Beyond those situations, you might dislike the lender on your current auto loan and might want to switch to a brand with better customer service. Or maybe you want to have a shorter repayment period with a lower interest rate so you can pay your car off faster without paying too much in interest.

All of these situations may make it worth considering a car loan refinance. Auto loan refinancing may be right for you if you can secure a lower annual percentage rate (APR). Lenders calculating APR on a car loan may determine your finance charges.

Recommended: Can You Refinance a Car Loan With Bad Credit?

When Not to Consider Refinancing Your Car

That being said, it’s not always a good idea to refinance your car.

If you owe more on your current loan than your car is worth, you may not even qualify for a refinancing loan. Even if you do qualify, refinancing an upside down car loan may not be right for you.

Or if you want to refinance $4,000 or less, some lenders won’t loan such a small amount to you.
If your car is more than 10 years old, you probably won’t be able to refinance either. Refinancing a car with high mileage can be challenging at best.

If you want to refinance, have a good reason and a plan to either save money by doing so or lower your monthly payments so you can afford them.

Will Refinancing Affect Your Credit?

You may also be wondering, does refinancing hurt your credit?

The answer is that it can impact your credit, but there should be no long-lasting harm. Whenever you apply for an auto refinancing loan, there is a hard inquiry on your credit report as the lender does a credit check to see what your financial situation is.

The good news is that if you apply or check to see if you prequalify with multiple lenders, credit bureaus see these as one inquiry rather than many. In other words: they understand that you’re shopping around for a good deal and they don’t penalize you for it.

These hard inquiries may affect your credit score temporarily but will stop impacting it within a year.

Recommended: What Credit Score Do You Need to Refinance a Car?

The Takeaway

Refinancing your car loan can unlock significant savings if you secure a lower interest rate or better terms, but it’s important to factor in potential costs — like early termination fees from your current lender, transaction or application fees, and any late‐payment charges. Always read the fine print and request fee waivers when possible.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Does it cost money to refinance a car?

Some lenders may charge fees for a refinance loan, including early payment fees, transaction fees, and transfer fees. Additionally, your state may require you to transfer your car title, which may also involve fees.

How much does it cost to refinance a car?

Fees may vary from one lender to another. Read your contract to find out details on specific fees. Your state may also require registration and/or title transfer fees.

Are there closing costs to refinance a car loan?

There may be closing costs, depending on your loan and lender. Check with your lender before signing your new loan agreement.

How do I renegotiate my car loan interest rate?

If you’re looking for a better car loan interest rate, you may want to check out what rates would be available to you with a refinance loan. If you feel you can get a better deal, you can refinance, either with your original lender or with a new one, ideally for a lower rate.

Photo credit: iStock/andreswd

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-037

If your credit is less than stellar and you’re in the market for an auto loan refinance, you may be intrigued by ads for guaranteed auto refinancing. To clarify: All borrowers can’t get approved for guaranteed auto refinancing. What this typically means is refinancing is offered from a lender that often may not be concerned with your credit score. Therefore, these loans, also called no credit check loans, can be useful for people with poor credit histories.

But, of course, these loans typically have disadvantages, too, like high interest rates. With auto refinancing, stay focused on your financial goals. Your bottom line shouldn’t be just getting approved, it should be either saving money on interest or lowering your monthly payment during a period of hardship. Read on to learn more about how to proceed.

What Is Guaranteed Auto Financing?

Guaranteed auto financing refers to new car loans or used car loans you can get regardless of your credit history. Borrowers who are seeking an auto loan with a low credit score or a limited credit history may want to apply for guaranteed car financing so they won’t have to worry about getting denied due to a credit check.

In some ways this may seem practical. A hard inquiry on your credit report may cause your credit score to go down several points. And too many inquiries may raise a red flag to lenders that you’re having cash flow issues.

If you are car loan shopping and undergo multiple hard inquiries within a 14-day window, a credit scoring model may calculate this activity as a single event.

That being said, there’s no guarantee that all borrowers will qualify for auto financing. You may qualify for subprime auto loans with bad credit, but chances are that the interest rate you’ll be offered will be higher than the rate of a conventional auto loan.

Is There Such a Thing As Guaranteed Auto Loan Refinancing?

You may not qualify for a lender’s “guaranteed” auto refinancing if you don’t meet the lender’s minimum standards of approval. In other words, auto loan refinancing is not guaranteed for everyone.

Usually, lenders that advertise guaranteed car refinancing focus on assessing factors like a potential borrower’s income and assets rather than credit. In fact, they may not even perform a credit check. Instead, the application process will likely include income and employment verification, as well as a down payment. When refinancing, you may need equity in your car, meaning that the loan amount will be lower than the total value of the vehicle.

Pros and Cons of Guaranteed Auto Loan Refinancing

There are both pros and cons to refinancing your car loan.

One of the pros of guaranteed auto loan refinancing is that a credit check will probably not be required. That can make it easier for people with poor credit to get an auto loan refinance. Another pro is that you may secure a lower monthly payment with guaranteed auto loan refinancing.

One of the auto refinancing downsides is that you may pay more interest over the life of your auto refinance loan if you’ve extended your term.

Below are some steps you may take if you’re considering a guaranteed refinance auto loan:

•   Ask questions about rates

•   Find out how much it costs to refinance

•   Explore whether the application process involves a hard pull credit check

What Affects Your Chances of Approval?

How does car loan refinancing work? There are three primary factors that affect your odds of getting approved:

Employment. If you’re opting for a guaranteed car loan refinance, your credit score may not be reviewed. Instead, a lender may look at factors like your income and employment.

Debt-to-income ratio. Lenders typically want to know you can afford your monthly loan payment in addition to all of your other debts. Using your debt-to-income ratio, they’ll analyze your monthly income (before taxes are taken out) to your monthly debt payments. Think about how your income and debt have changed before you apply to refinance your car loan.

Vehicle. Most lenders have restrictions on what types of vehicles are eligible to refinance. For instance, they may have maximum age and maximum mileage standards. Some lenders may not want to lend if you have a high-mileage car. Finally, your loan balance may need to meet a certain threshold; a lender may not want to make a loan that’s too small or too big.

How to Offset a Bad Credit Score

First, check with your existing lender to see if they’re willing to change any of your loan terms without refinancing the loan. They may prefer to negotiate rather than lose your business.

If you want to refinance your car loan with bad credit, you may refinance with a cosigner. The cosigner shares responsibility for the car loan with you. This reduces risk to the lender and may therefore help you get approved for auto refinancing.

Recommended: Can You Refinance a Car Loan With the Same Lender?

Checking Auto Loan Refinance Rates

Instead of looking solely at guaranteed refinance auto loans, make sure you review multiple lenders to find the right auto refinancing for you.

Car loan interest rates can vary greatly from lender to lender. Look at both the base interest rate and the annual percentage rate (APR), which helps you compare any finance charges associated with the loan.

This is the time it’s especially important to stay focused on your refinancing goals. You may be trying to lower your monthly payments regardless of the long-term costs involved. Or you may want to save money on interest, regardless of how that affects your monthly payments. Keeping your goal in mind helps you compare loan rates and other terms in a way that serves your best interests. You can use an auto loan refinance calculator to better understand your options, if you like.

Checking auto loan refinance rates, however, may not be right for you if you currently have a 0% APR car loan.

Recommended: Cash Out Auto Loan Refinance

The Takeaway

Guaranteed car refinances may be one way to get a car refinance loan if you don’t have great credit. But you don’t necessarily need a guaranteed car refinance to find a lender that’s willing to work with you. Think carefully about your options to make sure you understand the monthly costs and overall interest due, as well as other loan features, before making a decision.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What disqualifies you from refinancing a car loan?

Factors that can disqualify you from refinancing include a poor credit score, high debt-to-income ratio, negative equity, and restrictions related to type of vehicle, its age, mileage, and condition. Additionally, some lenders may reject applicants who’ve had a history of late or missed payments or have what’s considered insufficient income.

What credit score is needed for an auto refinance?

There’s no specific credit score that’s needed to refinance your car. Loans are available for people with a wide range of scores. However, a FICO® score of 660 or higher usually means you’ll likely get standard offers, and a score over 700 will open up more favorable rates and terms.

Do I need a down payment to refinance my car?

Generally, you do not need a down payment to refinance a car loan. However, you will need to have equity in the vehicle, meaning the car’s value is higher than the remaining loan amount. When your car has negative equity (meaning you owe more than its value), you might be required to make a down payment to achieve positive equity before refinancing.

Photo credit: iStock/Jinda Noipho

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOALR-Q325-036

Auto loan prequalification and preapproval are two different ways to get a sense of what kind of financing you might get from a potential lender before sealing the deal — or even going to the dealership. Sometimes you may see the two terms used interchangeably. But they’re not identical: Preapproval involves a deeper and more formal review of your financial status and likely loan offer.

It’s important to understand the similarities and differences between the two.

What Does Preapproval Mean?

Auto loan preapproval is a way to learn from a potential lender what kind of car loan offer you are likely to be extended. This conditional estimate includes the amount of money it will be willing to provide and loan details. This information is based on a thorough review of your finances. In order to be preapproved, you typically have to share information about your identity, address, income, and employment status. And lenders will typically do a hard credit pull to verify your creditworthiness.

With a preapproval, you typically receive a letter from the lender listing the exact loan terms, interest rate, and the amount you can borrow. Preapprovals typically expire in 30 to 60 days, so it’s wise to request one only when you’re serious about buying your car soon.

Remember that getting preapproval does not mean that you have gotten the loan. You could still be refused or the terms could change, especially if your financial situation changes before you take out the loan — if, for instance, you lose your job.

What Does Prequalifying for a Car Loan Mean?

Auto loan prequalification is another way for a would-be borrower to determine whether they’re eligible to receive a loan from a lender. But prequalifying is typically less rigorous and has fewer requirements than preapproval. If the lender does a credit check for prequalification, it will usually be a soft inquiry.

If you want to be prequalified for a car loan, you’ll likely be asked to provide your financial information to a lender or institution, which may also do a soft credit check. Then, if you are prequalified, the lender will offer you an estimate of what you might receive. As with preapprovals, these numbers are not set in stone and can change before you purchase a car or you could even be denied the loan, especially if your information changes.

Preapproval vs Prequalification: What’s the Difference?

The below table compares preapproval vs. prequalification:

Prospective car buyers don’t necessarily have to choose between prequalification and preapproval. Prequalification can be an initial step, when you’re at the browsing stage. But when you get serious about your car purchase, you may want to get preapproved.

Bear in mind that, unlike prequalification, preapproval typically requires a hard credit pull, which can have a negative impact of several points on your credit temporarily, so you may not want to take it lightly. But it can also signal to car dealers that you are a serious buyer — and that you’re not reliant on the dealership for funding.

What Are the Benefits of Getting Preapproved?

Below are several benefits to getting preapproved for a car loan.

1. It Can Reduce Purchasing Guesswork

Getting preapproved can make it easier to visualize the exact terms of a car loan, so you can have a firm budget in mind before you even start to shop. With a clear idea of how much you can spend, you can focus on vehicles that fall within that price range.

2. It May Create Negotiating Power

When you have a preapproval in hand, it lets dealers know you’re a creditworthy buyer who doesn’t have to be dependent on their financing. This may give you an extra bit of negotiating power, which can remove some of the stress from the car purchasing process. Car salespeople may be less likely to try to pressure you into dealership financing options that could cost more than you’re comfortable paying.

3. It Can Help You Avoid Upsells

When it’s time to sit down and sign the paperwork, having a preapproval letter can help you stave off unnecessary upsells and add-ons. You can simply commit to not going over the preapproved amount. In some cases, the dealer might even try to beat the preapproval rate, helping you lock in a better deal.

Are There Any Disadvantages to Preapproval?

Here are a few possible downsides of preapproval to consider.

1. It Has a Specific Time Frame

One of the disadvantages to preapproval is that you may have a limited time to act. Your preapproved car loan letter offer may expire within 30 to 60 days. That means your preapproved financing and interest rate could fall through if you fail to take advantage of the offer before it expires.

2. You May or May Not Be Able to Extend the Preapproval

You may apply for preapproval a second time if your initial preapproval letter expires, but there’s no guarantee. Even if you are preapproved a second time, the terms and conditions of your second preapproval may not be right for you. The second preapproval letter could potentially feature a higher annual percentage rate (APR).

3. The Preapproval May Limit You to Certain Dealerships

A preapproved car loan letter offer may also restrict where you can buy a vehicle. For example, a lender may require that you buy a car from its list of authorized dealers, limiting your car buying options.

4. A Preapproval Is Not Final Approval

Another disadvantage to preapproval is that it’s not equal to full approval. A lender may cancel your preapproved loan letter offer if you fail to meet its underwriting and qualification standards on the date of sale. If you get preapproval for a car loan, there’s still a chance you may be denied financing.

How Do You Get Preapproved for a Car Loan?

If you’re wondering exactly how the car loan preapproval process works, here are six steps on how to get preapproved for a car loan:

1. Estimate Your Budget

Try to assess what you can afford to spend by way of down payment initially and then every month for your payments.

2. Review Your Credit Report

Before issuing a preapproval, lenders will typically review your credit history to see if they think you’re likely to repay the loan on time. In order to do this, the lender generally conducts a hard inquiry, which can have a direct but temporary impact on your credit score.

It can be a good idea for you to review your credit report before meeting with a lender. That way, you can help ensure there are no unexpected issues. If any of the information on your report is incorrect, you can dispute it.

3. Gather Information About Your Ability to Pay

Lenders will also typically want extensive personal and financial information to show that you’ll be able to afford the payments. It can be helpful to start pulling this information in advance so you’ll have it ready. Consider preparing the following:

•   Proof of employment status

•   W-2s and any other income verification information

•   Social Security number

•   Identifying documents, such as driver’s license, military ID, state ID, or passport

•   Proof of assets

4. Review Loan Preapproval Terms

You’ll want to be sure that the deal you’re offered meets your needs. Factors to examine can include:

•   Loan amount: This is the total amount you can borrow. You can generally take out less money, if you so choose, since this may be more than you want to take out or may require higher monthly payments than you can make.

•   Loan term: This is how long you will be paying the loan back.

•   Interest rate and APR: This will let you know how much the loan is costing you.

•   Monthly payments: This is how much you will have to pay the lender back each month.

Recommended: What Credit Score Do You Need to Refinance a Car?

5. Shop Around for the Best Loan Offer

Generally speaking, simply taking the first loan offer you receive is not the soundest borrowing strategy. Getting multiple car loan offers from a few different lenders can help you review and compare different loan features in depth, helping you get a desirable rate with terms that stay within your budget.

6. Hit the Dealership Floor

Once you’ve received auto loan preapproval from multiple lenders, it’s time to take the best offer to the showroom and start shopping around. Since most preapprovals expire within 30 to 60 days, it’s wise to apply for preapprovals within a short period of time and then get to the dealership sooner rather than later.

Tips for a Smooth Car Loan Preapproval Process

Here are some tips for how you can approach the car loan preapproval process.

•   Shop around and compare rates. Banks, credit unions, and private lenders may offer preapproved car loans. You can shop around and compare rates from different financial institutions. Comparing terms can help you buy a car with financing that’s right for you.

•   Understand hard inquiries. A hard inquiry can cause your credit score to drop several points for several months, but credit scoring models may calculate multiple hard inquiries as one inquiry if you’re rate-shopping for car loans over a short period (typically within 14 to 45 days at the maximum).

•   Be familiar with auto financing. There are different types of car loans. Getting secured or unsecured auto financing from a bank can be difficult with bad credit, but other lenders may offer subprime auto loans at high rates of interest.

•   Search for deals online. Going to brick-and-mortar retail banks to apply for car loans can be time-consuming. You may save time by applying for an auto loan online.

•   Don’t confuse preapproval with final approval. Getting preapproved for a car loan doesn’t guarantee final approval. Auto lenders may cancel your preapproved loan offer if your financial circumstances change for the worse. It can be helpful to know when a car loan is finalized.

Who Can Preapprove You for a Car Loan?

Here are some of the financial institutions that may offer you a preapproved car loan:

•   Banks, both traditional and online

•   Credit unions

•   Private lenders

The way auto loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include APR finance charges.

Borrowers also must provide proof of identity and proof of income when applying for auto loan financing, among other auto loan requirements.

Does Preapproval Guarantee Getting the Car Loan?

As mentioned earlier, getting preapproved for a car loan doesn’t guarantee final approval. Auto lenders may cancel your preapproved loan offer if your financial circumstances change for the worse.

Some lenders, for example, may revoke the preapproved offer letter if you experience a large and sudden increase in your debt-to-income ratio or DTI.

In terms of how to buy a car with preapproved financing, you will need to meet a lender’s underwriting and qualification standards by the date of sale. Meeting those standards may give you full approval to purchase a vehicle with your car loan.

Here are several auto loan shopping tips that may guide you in the car buying process:

•   Set your budget, including your target purchase price

•   Check your credit report and scores before car loan shopping

•   Consider whether you’ll need a cosigner

•   Shop for car loans from multiple sources

•   Consider getting prequalified or preapproved

•   Read the fine print before committing to an auto loan

How to Buy a Car With a Preapproved Loan

You can get preapproved for a secured auto loan before going to a dealership. Here are the basic steps of buying a car with preapproved financing:

1.    Apply for a preapproved car loan with a financial institution

2.    Receive your preapproval

3.    Go to an eligible car dealership

4.    Look at the new or used vehicles within your budget range

5.    Test-drive any new or used car that you like

6.    Negotiate for a sales price that’s right for you

7.    Finalize the deal with the dealer and the lender

8.    Have your lender listed as the lienholder on the car title

9.    Drive off the lot as the owner of the financed vehicle once details are handled

10.    Make car loan payments in accordance with the terms and conditions of your financing agreement

The best auto loan interest rate is 0% APR, but the average interest rate on new car loans stood at 6.73% during the first quarter of 2025 and 11.87% for used car loans, according to Experian®.

Recommended: How Does Car Leasing Work?

What Are the Benefits of Getting Prequalified?

Prequalification is a way to get a better idea about your odds of approval and the loan terms you might be likely to get before you submit a loan application. Some of the other benefits of getting prequalified can include the following.

1. You Get a Take on What You Qualify For

Getting prequalified may be less intensive than getting preapproved, but it still paints a pretty detailed picture of how creditworthy you look to a lender. Seeing what responses you get from potential lenders can give you a good sense of what kind of loan you’re likely to be offered.

2. It Gives You a Sense of Your Budget Limits

Going through the prequalification process may not give you a definitive loan offer, but it can help you estimate how much loan you’re likely to get and how much you can expect to pay in monthly payments before you even enter the dealership.

3. It Doesn’t Impact Your Credit Score

Getting prequalified for a loan offer typically doesn’t impact your credit score, so there may be no downside to exploring whether you prequalify for financing.

Recommended: What Happens to a Car Loan When Someone Dies?

Are There Any Disadvantages to Getting Prequalified?

There are a few possible disadvantages to prequalification for a car loan.

1. It Doesn’t Allow You to Skip a Full Application

One of the disadvantages to getting prequalified is you still need to submit an application to know for sure whether the lender will approve your request for financing. Submitting a loan application may require a hard pull inquiry, which can cause your credit score to drop by a few points.

2. The APR and Terms May Change

Another disadvantage to getting prequalified is lenders may not honor the APR and repayment terms as outlined in your prequalified loan offer. This means the lender may approve you for financing at a higher rate of interest than outlined in your prequalified loan offer.

3. It Doesn’t Guarantee Approval or Terms

A major disadvantage of getting prequalified is it may not be a reliable indicator of what the lender will do if you submit an application for auto loan financing. You may not be approved, or you might be approved but for a different APR and terms.

How Do You Get Prequalified?

The process of getting prequalified for a loan is somewhat similar to getting preapproved for a loan, though typically a little less rigorous. Here are a few steps you might typically take.

1. Determine Your Budget

As with preapproval, the first step in the prequalification process is figuring out a budget that fits your financial goals so there are no surprises.

2. Gather Information for Lenders

Your potential lender will likely want to know about your identity, income, employment status, and current debt obligations. Having things like your Social Security number, photo ID, proof of income, and housing payment info handy can be helpful. In most cases, it will also make a soft credit pull, so if you have concerns about your credit, you may want to look at your credit report prior to contacting a potential lender.

3. Pay Close Attention to the Loan Terms

Prequalification isn’t considered a guarantee of loan approval. So this is a good time to review the loan terms — before any formal agreement. Here are some figures to review in detail:

•   Loan amount: How much you can borrow from the lender

•   Loan term: How long you’ll have to repay the loan

•   Interest rate and APR: How much you’ll pay the lender in auto loan finance charges each year as a percentage of the outstanding loan balance

•   Monthly payments: Your minimum monthly payment over the loan’s lifespan

The steps outlined here for prequalification and preapproval are similar to those that you’d follow when refinancing an auto loan, too.

The Takeaway

Regardless of whether you apply for car loan prequalification or preapproval — or end up doing both sequentially — you may be able to use the processes to your benefit. Both options can potentially help you develop a budget before you begin shopping seriously. Just remember that asking for a preapproval serves as a more formal declaration that you intend to buy a car (and it takes more work), while getting a prequalification is a more casual request for an estimate of what a lender could offer you.

Once you purchase your car, even if you get a good deal, you may eventually want to refinance.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Does car loan preapproval hurt your credit score?

Yes, car loan preapproval may hurt your credit score if the lender conducts a hard pull inquiry into your credit report. Hard inquiries may cause your credit score to drop by several points temporarily.

Can you be denied an auto loan after preapproval?

Yes, a lender may deny your auto loan application and cancel your preapproval if you fail to meet its underwriting and qualification standards on the date of sale. Remember that preapproval is not a guarantee of financing. If you get preapproved for a car loan, there’s still a chance you may be denied financing.

How long does car loan preapproval take?

Applying online for car loan preapproval can take anywhere from several minutes to 24 hours in most cases, depending on the lender and when you initiate the request. The process may take longer in some cases, but getting car loan preapproval can be a quick and easy process for creditworthy consumers who have proof of identity.

Photo credit: iStock/Jinda Noipho

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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If you’re planning to buy a used car or sell your old vehicle, a car appraisal is a critical part of the process. The appraisal will determine how much the car is worth and give you an idea of how much you may be able to get, or have to pay, for the car.

Here’s a look at your options and resources for a car appraisal.

What Is a Car Appraisal?

New cars come with what is known as the manufacturer suggested retail price, or MSRP. This is the price the automaker suggests that dealers charge for the vehicle. However, cars lose their value through a process known as depreciation, and will require an appraisal to determine their current value at any point in time.

The car appraisal process considers a variety of factors, including the vehicle’s make and model, trim level, mileage, condition, age, and local market conditions.

Who Administers a Vehicle Appraisal?

There are a number of ways to get a car appraised. Some are free, while others come with a fee. Here’s a look at your options.

Self-Appraisal

Whether you’re buying or selling a vehicle, you can use an online valuation tool, such as Kelley Blue Book or Edmunds, to estimate a range in your vehicle’s value at no cost.

You simply input basic information about the car, such as its vehicle identification number (VIN), license plate number, and zip code, in order to get a range of resale values for your area.

As part of the evaluation, these sites will typically pull the vehicle history report to determine whether past accidents affect its value. On average, a minor accident can reduce the value of a car by 10% to 30%, while a severe accident could lower its value by 50% or more.

Car Lenders

If you’re in the market for a used car and getting financing outside of the dealership, the lender will typically send an appraiser to value the vehicle before offering a loan agreement. This is to be sure that the loan amount isn’t higher than the car’s cash value.

With most auto loans, the car you’re purchasing acts as collateral for the loan. If you default on the loan, your lender can seize the vehicle and sell it to recoup its losses. That’s why a car financing company wants to make sure the car’s value and the loan are aligned.

There is typically no cost to you for this service, and you can often use a lender appraisal as a negotiating tool to help you get a better deal on the car.

Dealerships

If you’re trying to sell your car to a dealership or trade it in toward the price of a new vehicle, the dealership will do its own appraisal.

This appraisal will typically involve similar research you have done, as well as an examination of the exterior, interior, mechanics, and overall condition of your vehicle. They may also conduct a test drive before offering a final value.

The dealer’s valuation is not necessarily indicative of the fair market value of the car, however. In fact, it’s often less. The reason is that the dealer needs to turn a profit. This profit will be the difference between what they pay you for the car and what they can sell it for, or the fair market value.

It may be helpful to do some research of your own through valuation websites before you go in for a dealer appraisal. That way, you’ll have a sense of how far off fair market value their offer is and have some negotiating power.

Professionals

If you’re buying or selling a collectible car, or need to value a car as part of a legal proceeding (such as a divorce or bankruptcy proceeding), you may want to turn to an independent professional appraiser.

Professional appraisers have expertise in sales of similar vehicles and will give the car an unbiased examination and appraisal. Unlike the other appraisal methods listed above, this one is not free. A professional appraisal can run at least $100, and often significantly more.

Recommended: What Is a VIN Number?

Factors That Influence Car Appraisals

Many factors can have an impact on the value of a car. Here’s a look at some of the most important.

Mileage

Cars that have higher mileage tend to be worth less due to wear and tear. The more a car gets driven, the more likely it is to experience minor damage or for components to wear out.

According to the Federal Highway Administration, the average annual number of miles a driver puts on a car in the U.S. is 13,476. If you’re driving more than that, the value of your car could take a hit.

Recommended: What Is Car Loan Amortization?

Condition

The condition of your car plays a major role in its value. Scratches and dents on the exterior or damage to the interior can lower its value, as can any components that need replacing, such as worn out brake pads or a slipping transmission.

Car Usage

How a buyer plans to use the car you’re selling will affect its value. As mentioned, a dealer will typically offer a lower appraisal in order to make a profit on reselling the car. A private buyer, on the other hand, might be more likely to agree to the fair market value of a car found on online valuation sites.

Location

Where you’re selling or buying a car will also impact its value. A convertible will likely be in higher demand (and command a higher price) in Los Angeles than in Boston. A pickup truck, on the other hand, might have a higher value in a rural area than in a city.

Recommended: Is Car Interest Tax Deductible?

Is a Car Appraisal Necessary to Refinance Your Car?

No, you typically don’t need to get a formal appraisal to refinance your car. The lender will likely look up the value of your vehicle themselves before approving a new loan.

They’ll also consider your loan-to-value ratio as part of the loan application process. This ratio compares what you owe on the car versus what the car is worth. If you owe less than what the car is worth, you might be able to get a better annual percentage rate (APR). If you owe more than the worth of the car, however, it means you are upside down on the loan.

You may still be able to refinance your car even with an upside-down car loan, though it will depend on your credit profile and how much you owe. Borrowers with good credit can often qualify for up to 120% of the value of the car, while borrowers with bad credit may qualify for around 80% of the car’s value.

Recommended: What Is the Average Car Loan Length?

The Takeaway

Car appraisal is an important step when buying or selling a used vehicle. Whatever side of the deal you are on, it can put you in a better position for negotiation.

Fortunately, there are a number of ways to get a car appraised, including online calculators, lender appraisals, and professional appraisals. Which appraisal option will work best for you will depend on your needs.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What is an appraisal for a car?

A car appraisal gives you an idea of the value of your car based on factors such as its make and model, mileage, condition, accident history, and location.

Do you need to get a car appraisal to refinance your car?

No, you generally don’t need to get a car appraisal to refinance your car, but your lender will likely value your vehicle themselves as part of the underwriting process.

How long does it take to get a car appraisal?

Getting a car appraised using an online valuation tool, like Kelley Blue Book, may only take a few minutes. Getting an appraisal at a dealer, however, could take 30 minutes. A collectible car may take more time to appraise.

Photo credit: iStock/Chong Kee Siong

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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