Why Do Car Dealers Run Your Credit So Many Times?
Demystify car dealer credit checks. Learn why multiple inquiries happen, their impact, and how to protect your credit score when buying a car.
It is common for individuals to question why car dealerships often conduct multiple credit checks during vehicle purchases. Understanding the reasons behind these inquiries and how credit scoring models function can help alleviate concerns. This article explains the mechanics of credit inquiries, the dealership’s lending approach, and strategies for managing credit checks when acquiring a vehicle.
How Credit Inquiries Work
Credit inquiries are requests made to credit bureaus to access an individual’s credit report. There are two types: soft inquiries and hard inquiries. A soft inquiry occurs when someone checks their own credit or when a potential lender pre-approves an offer. Soft inquiries may appear on personal credit reports but are not visible to other lenders, and they do not affect credit scores.
A hard inquiry happens when an individual applies for new credit, such as a loan or a credit card. This allows lenders to assess creditworthiness and typically causes a small, temporary dip in a credit score. Hard inquiries can remain on a credit report for up to two years, though their impact on credit scores usually diminishes after one year.
Credit scoring models recognize that consumers often shop for the best rates on significant loans. For this reason, multiple hard inquiries for the same type of loan, such as an auto loan, within a concentrated timeframe are often treated as a single inquiry. This “rate shopping” window typically ranges from 14 to 45 days, depending on the scoring model used.
The Dealer’s Lending Process
Car dealerships often act as intermediaries in the auto financing process, connecting buyers with a network of lenders. This network includes various financial institutions such as banks, credit unions, and specialized captive finance companies. Captive finance companies are subsidiaries of vehicle manufacturers, like Toyota Financial Services or Ford Credit, which provide loans for their specific car brands. These entities offer financing to support sales and may provide competitive rates or promotions.
When a buyer applies for financing at a dealership, the dealership’s finance department typically submits the credit application to several of these lenders. This practice, often called “rate shopping,” aims to secure the most favorable interest rate and terms for the buyer. Different lenders have varying underwriting criteria, risk appetites, and promotional offers, making it beneficial to explore multiple options. This process also helps ensure that a financing approval is obtained.
While each lender generates a hard inquiry, the concentrated nature of these inquiries within the defined shopping window minimizes their collective impact on the credit score. Dealers often streamline this process, allowing customers to complete applications and potentially drive away with a vehicle quickly. This approach benefits both the buyer by potentially securing a lower rate and the dealership by facilitating the sale.
Managing Credit Inquiries When Buying a Car
Buyers can take proactive steps to manage credit inquiries when purchasing a vehicle. Obtaining a pre-approval for an auto loan from a personal bank or credit union before visiting the dealership is a beneficial strategy. A pre-approval provides a benchmark interest rate and loan amount, which can strengthen negotiating power. This pre-approval typically involves a hard inquiry, but it can help reduce the need for the dealership to send applications to many lenders.
When at the dealership, discuss the financing process and express a preference for limiting the number of lenders to whom the application is submitted. While dealerships work with many lenders to find the best terms, communicating this preference can help manage the process. It is important to complete all credit applications for auto loans within a short timeframe, ideally within 14 to 45 days, to ensure that multiple inquiries are grouped as a single inquiry by credit scoring models.
Regularly reviewing credit reports is important. Individuals are entitled to a free copy of their credit reports annually from each of the three major credit bureaus. Reviewing these reports allows buyers to ensure accuracy and identify all inquiries. Addressing inaccuracies before seeking new credit can help maintain a strong credit profile.