What Happens If I Get Approved for a Car Loan but Don’t Use It?
Approved for a car loan but didn't use it? Get clear answers on what happens next, understanding the subtle impacts and your financial standing.
It is a common experience to apply for a car loan, receive an approval, but then decide not to proceed with the purchase. This scenario often leaves individuals wondering about the financial implications of an unused loan approval. Understanding the effects of such an approval can provide clarity and financial peace of mind. Knowing the details helps in managing personal finances effectively.
Immediate Credit Score Impact
When you apply for a car loan, the lender performs a “hard inquiry” on your credit report to assess your creditworthiness and determine loan terms. A single hard inquiry can temporarily lower your credit score, usually by a small margin. While this inquiry remains on your credit report for up to two years, its impact on your score generally diminishes after approximately one year.
Credit scoring models recognize “rate shopping” for auto loans. Multiple hard inquiries for the same type of loan within a specific timeframe are often grouped and treated as a single inquiry. This “rate shopping window” typically ranges from 14 to 45 days, minimizing the negative effect on your score when comparing loan offers.
If the approved car loan is not utilized, no new account will be opened or reported to credit bureaus. Consequently, positive credit-building aspects, such as a history of on-time payments, will not materialize. The only lasting effect on your credit report from an unused approval is the initial hard inquiry. This inquiry has a minor and temporary influence on lending decisions, especially if it is an isolated instance.
Understanding Loan Approval Expiration
Car loan approvals have a specific validity period during which the offer remains accessible. This timeframe allows applicants to finalize their vehicle selection and complete the financing process. The typical validity period for a car loan approval ranges from 30 to 60 days. Some lenders may extend this period to 90 days.
If the loan is not used within this specified period, the approval simply expires. No further action is required from the applicant. The offer of financing automatically lapses, and the lender’s commitment concludes. This means the applicant is no longer able to draw upon those funds.
Should a car purchase be delayed beyond the approval’s expiration, reapplication for a new loan may become necessary. A new application entails another credit inquiry and a fresh assessment of the applicant’s financial situation. Therefore, it is advisable to align the loan application timing with the readiness to purchase a vehicle.
Absence of Financial Obligation
A car loan approval represents an offer of financing, not a binding commitment to borrow. There are generally no financial penalties, fees, or interest charges associated with an approved car loan that is not utilized. You are not obligated to accept the funds or proceed with the loan.
The distinction lies between a loan that has been approved and one that has been disbursed. Financial obligations, such as repayment schedules and interest accrual, only commence once the loan funds have been received or paid to the seller, and the loan agreement has been executed. Until that point, the approval is merely an invitation to borrow.
You can walk away from an unused approval without incurring any debt or financial repercussions. The approval process allows you to understand your borrowing capacity and potential interest rates without committing to the loan. This flexibility is a standard practice in the lending industry.
What to Do Next
After receiving a car loan approval that you do not intend to use, no specific action is required. The approval will simply expire on its predetermined date. This passive approach is sufficient, as the lender’s offer is time-limited.
While not typically necessary, you may consider a courtesy call to the lender to inform them of your decision not to proceed. This step is entirely optional but can be beneficial if you have a direct relationship with a loan officer or if you prefer to formally close out the application. It clarifies your intentions and ensures no lingering ambiguities.
The hard inquiry associated with the unused approval will remain on your credit report for a period, as discussed previously. However, for isolated instances, its impact is usually minor and temporary. If you anticipate applying for other significant credit, such as a mortgage, in the near future, it can be prudent to allow some time to pass after the inquiry, although the overall effect on future creditworthiness is often negligible for a single inquiry.