Does My Auto Loan Do a Hard Inquiry?
Find out if your auto loan application involves a hard inquiry. Understand its impact on your credit and what lenders evaluate.
When considering an auto loan, understanding how the application process affects your financial standing is important. Financial transactions often involve a check of your credit history, which can take different forms. This article explains whether applying for an auto loan typically results in a hard inquiry and what this means for your credit profile.
Understanding Credit Inquiries
Applying for an auto loan generally results in a “hard inquiry” on your credit report. A hard inquiry occurs when a lender formally checks your credit history to make a lending decision. This type of inquiry requires your explicit permission and signals to other lenders that you are actively seeking new credit. Hard inquiries can temporarily affect your credit score.
In contrast, a “soft inquiry” does not require your permission and does not impact your credit score. Soft inquiries typically happen when you check your own credit report or when a company pre-screens you for an offer. These inquiries are often used for informational purposes or pre-qualifications and are not visible to other lenders.
Impact of Auto Loan Inquiries on Your Credit
A single hard inquiry typically causes a small, temporary reduction in your credit score, often by fewer than five points. This impact is usually minor and temporary, especially if your credit history is otherwise strong. Hard inquiries remain on your credit report for up to two years, though their influence on your credit score generally diminishes after 12 months.
A key aspect for auto loan applications is the “rate shopping” rule. Credit scoring models understand that consumers often apply to multiple lenders to find the best interest rates for the same type of loan. To accommodate this, multiple inquiries for an auto loan within a specific timeframe are often treated as a single inquiry. This timeframe can vary, typically ranging from 14 to 45 days, depending on the scoring model used. This means you can shop around with several lenders for an auto loan within this window without multiple inquiries negatively affecting your score.
Lender’s Perspective and What They See
Auto lenders perform hard inquiries to assess your creditworthiness, evaluate the level of risk, and determine the terms of the loan, including the interest rate and loan amount. They use the information from your credit report to gauge your ability and likelihood to repay the debt.
Lenders focus on several specific elements within your credit report:
Payment history, which demonstrates your track record of repaying past and current debts.
Outstanding debts and debt-to-income ratio, indicating how much of your income is committed to existing debt payments.
Credit utilization, or the amount of credit you are using compared to your available credit.
Public records, such as bankruptcies, foreclosures, or a history of late payments, which can signal higher risk.