Your interest rate can make – or break – your monthly payment. For many of us, buying a car is a necessity. In places where public transit is limited or non-existent, it’s literally the only way to get around. As workers return to the office and find themselves commuting…
Rate shop with the least impact to your credit score by making multiple inquiries at once.
Car shopping is a process that often involves getting your credit score pulled multiple times. If you’re using a dealership, the financing department will run your credit with multiple lenders to try to find the best offer and loan terms.
Or perhaps, you might choose to shop around for different lenders to see what auto loan options you qualify for. Either way, applying for multiple car loans could affect your credit.
The impact on your credit score and report isn’t so black and white. Here are a few key things you’ll need to know when it comes to protecting your credit while applying for multiple auto loans.
Soft Inquiries vs. Hard Inquiries
An inquiry is an entry that could appear on your credit report when your credit information is accessed by a creditor or lender during an application. Think of an inquiry as someone taking a peek at your credit history to determine whether you should be approved for financing or a credit limit. Basically they are determining the risk factor of lending you money.
There are two types of inquiries: soft inquiries and hard inquiries. Soft inquiries are account reviews that are conducted to determine pre-approved offers. This could happen with or without your knowledge if a lender is trying to find out whether you could potentially qualify for credit. Thus, soft inquiries don’t typically show up on your credit report.
Hard inquiries are a result of an application for credit and your full consent for a lender to run your credit score. Therefore, hard inquiries do show up on your credit report and can stay for up to two years. Hard inquiries do have some impact on your credit score but it doesn’t have to be a negative impact. The key is to limit the number of hard inquiries that show up on your credit report at one time.
According to Experian, a credit score typically recovers from an inquiry within a few months so long as the account is being paid on time. In addition, Experian states that most credit scoring models no longer count hard inquiries past 12 months in credit score calculations.
This doesn’t negate the fact that you may need to shop around for multiple loan offers when you’re financing a car. Or, if you have bad credit, you may not get approved for an auto loan the first time and will need to submit an additional application with a different lender.
Can Multiple Credit Inquiries Ever Count as One?
On the bright side, many credit scoring models do account for the fact that people shop around for loan offers when making a big purchase, such as for a car or home.
FICO scoring models in particular usually give you a 30 to 45-day span to obtain multiple similar credit inquiries, but only count it as one. Meanwhile, other scoring models such as Vantage, give you around 14 days. This is commonly referred to as rate-shopping inquiries. In other words, credit scoring models know that you’re rate shopping, and agree not to penalize you for it as far as your credit report is concerned.
Ideally, you’ll find the car you’re looking for within a few short weeks, allowing all your inquiries from lenders to be consolidated. This lessens the negative impact on your credit score.
However, the scoring models may look for hard inquiries outside of that 30 to 45-day window and count those as separate inquiries. This is why it’s important to keep your car search focused and efficient so you can find the vehicle and loan that suits your needs within a reasonable timeframe.
Why Rate Shop in the First Place?
Rate shopping is one of the best ways to ensure you get the best auto loan interest rate and terms that you qualify for. Some banks and online lenders may have different rates and offers to consider that will likely compete with each other. If your credit is good, you should try to get the lowest interest rate possible.
This could help lower the overall cost of your loan (by hundreds or even thousands of dollars over the life of your loan) or even your monthly payment.
Rate shopping is best done online these days. You can go to the lender’s website and enter your information to see what you could qualify for. Sometimes, you’re able to compare multiple lenders’ offers all in one place from just one application.
At a dealership, the financing department often does the rate shopping for you. You give them permission to run your credit and they pull different offers from the partners they do financing with.
The only slight risk from rate shopping is that you could incur multiple hard credit inquiries. This is actually a small risk compared to a potentially larger benefit. According to MyFico, credit inquiries only impact about 10% of your overall credit score.
There’s also the option to get preapproved with an auto lender by filling out a short initial form. Getting preapproved only involves a soft credit inquiry and it could be a great way to compare offers before you apply, without impacting your credit.
Considering Multiple Auto Loans and Your Credit
You can apply for as many auto loans as you want, although this may not be advisable. If your applications fall outside the typical 14 to 45-day window most credit scoring models allow, each additional hard inquiry will show up on your credit report.
Having a car loan may impact your credit score in a few ways depending on how you manage it:
- Credit utilization: All car loans in your name show up on your credit report and this impacts your credit utilization. Your credit utilization represents the amount of credit you have relative to your total credit limit. The general rule of thumb is to keep your total credit utilization below 30%. If your new car loan amount pushes your credit utilization ratio over 30%, it could negatively impact your credit.
- Average age of credit: The average age of your credit is a factor that impacts around 15% of your score. Opening a new account via an auto loan will likely cause the average age of your credit accounts to decrease. This could in turn result in a slight credit score decrease. If you have a few long-term accounts though, it shouldn’t make a big difference in your credit score.
- Payment history: Making on-time payments has the biggest impact on your credit score. This means if you continue to make payments on your car loan by the due date each month, this could help you build positive payment history and increase your score.
If you’re ever in a situation where you decide to apply for a second auto loan, you can obtain two auto loans at the same time. Just keep in mind that it may be harder to get approved for a second auto loan.
Lenders will want to see that you can afford to pay both car payments, along with any other debts that show up when they run your credit. If you have excellent credit, low debt, and a solid income, getting a second car loan might not have a big impact on your credit score or finances.
Applying for a Car Loan With Bad Credit
It’s possible to get a car loan with bad credit although this process may involve more rate shopping or submitting more than one application. According to Experian, the average subprime credit score is around 586. There are some banks, online lenders, and dealerships that will work with borrowers who have bad credit.
You should expect to pay a higher interest rate in order to get approved, but you can still rate shop and consider all your options. Making a larger down payment or considering a used car can also be helpful. Some dealers have in-house financing where they can give you an offer on the spot. Other lenders may specialize in working with borrowers with bad credit.
Buy-here pay-here dealerships are more of a last resort due to high rates and fees. However, some do have no credit check requirements and approve borrowers based on their income and other factors.
If you have a flexible timeline for getting a new car, see if you can take some time to improve your credit and pay off some debt accounts. This could lead you to make fewer auto loan applications and also reduce the number of hard inquiries you’ll get as well.
How Refinancing Your Auto Loan Impacts Credit
Refinancing a car can save you money on interest or even help lower your car payment. If rates have decreased since you got your existing car loan or if your credit score has increased, you may want to run the numbers to see if refinancing makes sense.
The refinancing process is very similar to applying for a new car loan where you’ll need to apply and the lender will check your credit. This will result in a hard inquiry, but remember, if you do your rate shopping quickly, the credit bureaus will likely just count all the auto lender inquiries as one hard inquiry on your credit report.
Any negative effects from a hard credit inquiry should go away within a few months. But the benefits of refinancing could be long-lasting if you’re able to reduce your interest payments or even pay off your loan faster.
Rate Shopping Results Outweigh Impact to Your Credit
Hard credit inquiries naturally come with any formal application for credit, especially if you’re trying to get a car loan. You can limit the negative effects of hard credit inquiries by rate shopping during a fixed period of time.
Even if you do collect a few hard inquiries on your credit report, your credit score may only drop by five to 10 points. These effects will also be very short-term compared to the long-term positive effects of shopping around for the best auto loan rates and terms.