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Shopping around before committing to a car loan is always a good idea. But this doesn’t mean you should apply for every loan offer you see. Every time you apply for a car loan, the lender does a hard credit pull. Though how this affects your credit varies depending on the different credit scoring models.
In general, submitting your personal and financial details as part of a loan application will result in a hard inquiry and a mark on your credit report. A car loan provider uses that personal information, including your name and driver’s license number, to look at your credit report and list the inquiry. Car loan quotes and preapprovals usually only use a soft credit pull — which doesn’t affect your credit — though you should check with the lender to make sure.
Multiple hard inquiries listed on your credit report in a short span of time could negatively affect your credit score. However, some credit scoring models will allow for some level of shopping around when it comes to car loans. This means that instead of listing each car loan application as a separate inquiry on your credit report, it will group all of the applications into one hard inquiry. How long you have to rate shop depends on the credit scoring model and can vary between 14 and 45 days.
A soft credit inquiry is typically used for preapprovals and doesn’t affect your credit score. It gives creditors a surface-level look at your credit, without digging in to your payment history or credit use.
On the other hand, a hard credit inquiry is usually used with most loan and credit card applications. Each hard credit pull typically drops your score five or so points, though it can vary.
There’s no one number that is “too many,” but generally, one credit inquiry every three to six months is not considered to be risky behavior by lenders and shouldn’t affect your credit score too much. Multiple factors determine how many inquiries will affect your score, such as the length of your credit history and how many accounts you have. Keep in mind, hard credit inquiries remain on your credit report for two years.
You might want to consider waiting a few months to apply with another lender. This will give you time to strengthen your application, whether that means improving your credit score, coming up with a larger down payment or paying off some of your current debts.
If you’re in a position where you need to make a car purchase quickly, consider calling the lender to explain your situation and finding out whether or not your recent rejections will be an issue. You can also consider using an online car loan broker, which can help you find lenders you might qualify with by filling out one online form.
There are multiple providers that you can obtain your credit score from. Every year, you can get free credit reports from the three major credit bureaus: Equifax, Experian and TransUnion. And some credit card providers, including Chase and Discover, provide a free credit score on your monthly billing statement.
Yes, there are some car loan providers that work specifically with poor-credit applicants. Before you begin your search, you should build up a small deposit and examine your budget to figure out how much you can reasonably afford to pay each month. Then begin to research and compare the different lenders who specialize in high-risk car loans.
Depending on how bad your credit history is, it may also be worth getting in touch with your current bank to see if it would be willing to consider your application. Make sure to contact your bank before submitting an application.
It’s possible to shop around for a car loan without it having a huge affect on your credit score. But it all depends on the credit scoring model and whether it groups your multiple credit inquiries into one. You can learn more about how credit scores work in our guide, or visit our guide to car loans to compare options.
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