Does Car Loan Pre-Approval Affect Credit Score?
Unravel how car loan pre-approval affects your credit score. Understand different credit checks and how shopping for rates impacts your financial standing.
Obtaining a car loan involves a review of your financial history, with your credit score playing a significant role in the terms offered. Understanding how different actions in the loan application process affect this score is important for anyone seeking vehicle financing. This clarity allows individuals to make informed decisions. This article addresses the specific impact of pre-approval on your credit standing.
Types of Credit Inquiries and Their Impact
When engaging with lenders, two primary types of credit inquiries may occur: soft inquiries and hard inquiries. The distinction between these two is important because they carry different implications for your credit score.
Soft inquiries, sometimes called soft pulls, occur when a person or company checks your credit report for informational purposes. This can happen when you check your own credit score or when a lender pre-screens you for an offer without your direct application. These inquiries do not affect your credit score and are typically not visible to other lenders. They serve as a preliminary review or for personal financial monitoring.
Hard inquiries, or hard pulls, occur when you formally apply for new credit, such as a car loan, mortgage, or credit card. These inquiries require your explicit permission and signal to credit bureaus that you are seeking new debt. A hard inquiry can cause a small, temporary decrease in your credit score, typically by a few points. They remain on your credit report for up to two years, though their impact on your score usually diminishes after about 12 months.
Pre-Approval Versus Pre-Qualification: Differences and Credit Implications
When exploring car financing, you will likely encounter the terms “pre-qualification” and “pre-approval,” which represent distinct stages with different credit score implications. Understanding these differences is essential for navigating the loan application landscape.
Pre-qualification for a car loan is an initial assessment of your creditworthiness based on self-reported information or a soft credit inquiry. This process provides an estimated loan amount and interest rate you might qualify for, offering a general sense of your budget without affecting your credit score. It is a useful tool for comparing potential loan terms from various lenders without risking a dip in your credit score.
Car loan pre-approval is a more formal offer from a lender and typically involves a hard credit inquiry. During pre-approval, the lender conducts a thorough review of your credit history to verify your financial information and provide a firm loan offer with specific terms and rates. This hard inquiry can result in a slight, temporary reduction of a few points in your credit score. It is advisable to pursue pre-approval only when you are serious about purchasing a vehicle.
How Credit Bureaus Treat Multiple Auto Loan Inquiries
Consumers often shop around for the most favorable interest rates and terms on major purchases like car loans. This “rate shopping” behavior is treated differently than multiple applications for various types of credit. Credit bureaus, including those that generate FICO and VantageScore models, have mechanisms in place to mitigate the impact of these inquiries.
Major credit scoring models understand that seeking the best auto loan rate necessitates checking with several lenders. To accommodate this, they typically group multiple hard inquiries for the same type of loan within a specific timeframe. This means that numerous inquiries for car loans within this designated window are often counted as a single hard inquiry for scoring purposes. This approach allows consumers to compare offers without their credit score being penalized for each individual inquiry.
The exact “shopping window” varies depending on the credit scoring model. For instance, FICO scores generally consider multiple auto loan inquiries within a 14-to-45-day period as one inquiry. VantageScore models typically use a shorter 14-day window for grouping such inquiries. To ensure multiple inquiries are treated as a single event, it is advisable to complete all your loan shopping within a concise period, ideally within 14 days.