If youre in the market for a new car, chances are youre doing your research. Comparing prices, makes and models, and looking at various automakers are good places to start, but if you intend to finance the purchase, don’t forget to take your car loan into account. Shopping around for the best auto loan could save you a significant amount of money.
Getting preapproved for a car loan before visiting the dealer will help you better understand your spending capacity and provide you more negotiating power. And while getting preapproved can ding your credit a few points, the effect is short-lived. Heres what you need to know.
The short answer is: maybe. Your credit score may be impacted by applying for a car loan, but the degree of the impact will depend on a number of factors, such as:
- The number of hard inquiries on your credit report: Each time you apply for a loan, the lender typically pulls a hard inquiry on your credit report. This can temporarily lower your credit score by a few points. However, if you apply for multiple loans within a short period of time, the credit bureaus may group these inquiries together and only count them as one inquiry. This is known as a “rate shopping window,” and it typically lasts for 14 days.
- Your credit history: If you have a good credit history, a few hard inquiries are unlikely to have a significant impact on your credit score. However, if you have a limited credit history or a poor credit score, hard inquiries can have a more noticeable effect.
- The type of loan you are applying for: Some types of loans, such as auto loans, are considered to be more “rate sensitive” than others. This means that lenders are more likely to approve you for a loan if you have a good credit score. As a result, applying for a car loan with a good credit score is less likely to impact your credit score than applying for a loan with a poor credit score.
Here are some tips for minimizing the impact of applying for a car loan on your credit score:
- Shop around for the best interest rate before you apply for a loan. This will help you avoid applying for multiple loans and triggering multiple hard inquiries.
- Apply for loans within a 14-day window. This will help the credit bureaus group the inquiries together and only count them as one.
- Check your credit report before you apply for a loan. This will help you identify any errors that could be dragging down your credit score.
- Make sure you can afford the monthly payments on the loan. This will help you avoid missing payments, which can damage your credit score.
It is crucial to remember that maintaining good credit is still a good idea, even if applying for a car loan has little effect on your credit score. Both the interest rates you will pay and your future ability to be approved for loans can be impacted by your credit score.
Frequently Asked Questions
How can I check my credit score?
You can check your credit score for free at AnnualCreditReport. com. By opening an Experian account, you can also obtain your credit score from Experian at no cost to you.
How can I improve my credit score?
You can take a few steps to raise your credit score, such as:
- Pay your bills on time.
- Keep your credit card balances low.
- Avoid applying for new credit too often.
- Become an authorized user on a credit card with good credit history.
- Dispute any errors on your credit report.
What is a good credit score?
A credit score of 670 or above is typically regarded as good. However, depending on the lender, a different credit score may be deemed good.
What is a bad credit score?
A bad credit score is generally considered to be a score of 629 or lower. However, the specific credit score that is considered to be bad may vary depending on the lender.
I have bad credit. Can I still get a car loan?
Yes, you can still get a car loan even if you have bad credit. However, you may have to pay a higher interest rate or make a larger down payment. You may also want to consider getting a co-signer on the loan.
I need a car loan right away. What can I do?
If you need a car loan right away, you may want to consider getting a loan from a subprime lender. Subprime lenders specialize in lending to borrowers with bad credit. However, subprime loans typically come with higher interest rates and fees.
I’m not sure if I can afford a car loan. What should I do?
Before you apply for a car loan, it is important to make sure you can afford the monthly payments. You can use a car loan calculator to estimate your monthly payments. You should also consider your other expenses, such as your rent or mortgage payment, your utilities, and your groceries.
Additional Resources
Applying for a car loan can potentially impact your credit score, but the extent of the impact depends on several factors. By following the tips above, you can minimize the impact of applying for a car loan on your credit score.
How Do Car Loan Preapprovals Affect Your Credit?
When a lender verifies your credit, a hard credit inquiry is triggered by an approved auto loan, which may temporarily lower your credit score by a few points. Fortunately, the majority of credit scoring models permit consumers to compare auto loan rates without significantly harming their credit scores. If several hard inquiries for auto loan preapprovals happen within a 14-day period, scoring models typically treat them as a single inquiry.
Having a preapproval letter does not guarantee youll get approved for a loan. You may ultimately be denied if your financial situation changes between the time you are preapproved and when you apply for the loan. One instance where this could occur is if you were to lose your job during the application process.
What Is the Difference Between Prequalification and Preapproval?
Although preapproval and prequalification are sometimes used synonymously, their meanings can vary based on the type of loan you’re applying for and your lender. Lenders use these two methods to determine your chances of being approved for a new loan in the first place as well as the approximate loan amount, interest rate, and terms.
Some lenders may choose to forego the soft credit inquiry that is normally required for prequalification; however, this inquiry has no bearing on your credit score. You may also need to provide basic information like your annual income and monthly expenses. The prequalification offer you are given may vary, occasionally dramatically, depending on the results of the lender’s credit investigation during the application process.
Compared to prequalification, the preapproval process for auto loans (and mortgages) is more involved and yields a more precise approved loan amount. In order to review your credit more thoroughly, the lender will initiate a hard credit inquiry. In addition, they may need to know your employment status, monthly income, debt balances, and other personal and financial information. After that, they’ll let you know how much you can borrow. To give you more negotiating leverage, some lenders will even give you a real check that you can cash at the car dealership.