Does Getting Pre Approval for a Car Loan Affect Credit?
Understand how car loan pre-approval affects your credit score and learn smart strategies to manage its impact.
A car loan pre-approval provides a conditional offer from a lender, indicating how much money you might be able to borrow and at what interest rate, before you finalize a vehicle purchase. This process helps prospective car buyers understand their budget and potential monthly payments. A common concern for many individuals is how this step might influence their credit score. Understanding the mechanics of credit inquiries is important for navigating the pre-approval process effectively.
Understanding Credit Inquiries: Soft and Hard
Credit inquiries are records that appear on your credit report whenever a lender requests to view your credit information. There are two types of these inquiries: soft inquiries and hard inquiries. A soft inquiry, also known as a soft pull, occurs when a person or company checks your credit to pre-qualify you for offers. Checking your own credit score or report also results in a soft inquiry. Soft inquiries do not affect your credit scores and are often not visible to lenders viewing your credit report.
In contrast, a hard inquiry, or hard pull, happens when you formally apply for new credit, such as a loan or a credit card. When a lender performs a hard inquiry, they are assessing your creditworthiness for a potential lending decision. This type of inquiry is recorded on your credit report and can be seen by other lenders. Hard inquiries have the potential to impact your credit score.
The Impact of Car Loan Pre-Approval on Your Credit Score
Car loan pre-approval results in a hard inquiry on your credit report. Lenders conduct this detailed review of your credit history to determine the specific loan amount and interest rate they are willing to offer. This process allows them to assess the risk associated with lending to you.
A single hard inquiry causes a minor, temporary dip in your credit score, often by just a few points. The exact impact can vary based on your individual credit history. While a hard inquiry remains on your credit report for up to two years, its effect on your credit score diminishes after a few months and ceases to influence your score after 12 months. This temporary reduction in score is not a significant barrier to obtaining a loan, especially if you maintain responsible credit behavior.
Managing Multiple Pre-Approval Requests
When seeking a car loan, consumers often compare offers from multiple lenders to secure the most favorable interest rates and terms. This practice, known as rate shopping, is recognized by credit scoring models. Credit scoring systems, such as FICO and VantageScore, incorporate rules that mitigate the impact of multiple inquiries for the same type of loan within a specific timeframe.
For auto loans, multiple hard inquiries made within a concentrated period are treated as a single inquiry for scoring purposes. This accommodation prevents your credit score from being disproportionately harmed by shopping around for the best rates. FICO scoring models allow a shopping window of 14 to 45 days, treating all auto loan inquiries within this period as one. VantageScore models consolidate inquiries made within a 14-day window. To maximize this benefit, complete all your pre-approval applications within a 14-day timeframe.