Shopping for the best car loan rates is crucial, but many worry that multiple applications could hurt their credit score. In this guide, we’ll break down how car loan applications impact your credit and share tips to minimize any potential downsides, so you can confidently secure the best deal without unnecessary damage to your credit.
Understanding Hard vs. Soft Credit Inquiries
When a lender checks your credit, it’s known as a credit inquiry, which can be either hard or soft.
- Hard Inquiries: These occur when you apply for new credit, like a car loan. They can slightly lower your credit score, usually by 2-5 points, but the impact is temporary.
- Soft Inquiries: These happen when lenders review your credit without an official application, such as pre-approved offers. Soft inquiries don’t affect your credit score.
Do Car Loan Preapprovals Hurt Your Credit?
Getting preapproved for a car loan is a smart move that gives you an idea of the loan amount, interest rate, and terms you might qualify for. However, preapprovals often involve a hard inquiry, which can cause a small, temporary dip in your credit score.
While some lenders may start with a soft inquiry, others may go straight to a hard pull. Typically, the impact is minor, with a slight decrease in your score that recovers within a few months.
The Impact of Applying for a Car Loan
When you formally apply for a car loan, the lender will perform a hard inquiry, which shows up on your credit report. This can result in a small, temporary drop in your credit score, usually between 2-10 points.
However, credit scoring models recognize that you’re shopping around for the best rate, so multiple inquiries within a short period are often treated as a single inquiry. As long as you limit your applications to a handful of lenders, the impact on your score will be minimal.
The Effects of Multiple Applications
Submitting too many car loan applications in a short timeframe can have a larger impact on your credit score. Multiple hard inquiries may signal to lenders that you’re seeking excessive credit, which can be perceived as risky behavior.
That said, the overall effect is generally small. For example, according to FICO, applying for loans from several lenders within a 45-day period might lower your score by 5-10 points. But this small decrease is often outweighed by the savings you can achieve by securing a better interest rate.
Why It’s Worth Shopping Around
Even though multiple applications can temporarily lower your score, the long-term savings from finding the best interest rate far outweigh this small impact. For instance, on a $30,000 loan over five years, a 4% interest rate could save you over $1,600 compared to a 6% rate.
Being strategic in your rate shopping—such as limiting inquiries and spacing out applications—can help you find the best deal without significantly affecting your credit.
Tips for Minimizing Credit Impact While Shopping for a Car Loan
- Compare Rates Before Applying: Research rates online from various lenders before submitting full applications. This allows you to shortlist lenders that offer competitive terms without impacting your credit.
- Ask About Soft Inquiries: When contacting lenders, ask if they can preapprove you with a soft credit check. This lets you explore loan options without the risk of a hard inquiry.
- Limit Your Applications: Stick to applying with your top 3-5 lenders to avoid multiple hard inquiries that could lower your score.
The Importance of On-Time Payments
Once you secure a car loan, making all your payments on time is crucial. Payment history is a significant factor in your credit score, so consistent, timely payments can help offset any minor drops from the application process and even improve your score over time.
The Bottom Line: Don’t Fear Credit Inquiries
While applying for car loans can cause small, temporary drops in your credit score, the impact is minor and often worth the potential savings. By being strategic—comparing rates first, limiting applications, and asking about soft inquiries—you can secure the best loan without significantly affecting your credit.
Once approved, maintaining on-time payments will further protect and even improve your credit score, ensuring that your auto loan becomes a tool for financial stability.
Conclusion
Securing the best car loan rates doesn’t have to come at the expense of your credit score. By following these strategies—comparing rates, limiting applications, and maintaining on-time payments—you can find the right loan without worrying about long-term credit damage. Remember, the short-term impact on your credit is minor compared to the potential savings from a lower interest rate.
