Does Applying For a Car Loan Hurt Your Credit Score?

If you're considering applying for a car loan, you might be wondering how it could impact your credit score. The relationship between credit inquiries and your credit score can be a bit complex.

In this article, we'll explore whether applying for a car loan can hurt your credit and clarify that any potential impact is very temporary and minimal.

The Two Types of Credit Inquiries

Credit inquiries fall into two categories: "soft" inquiries and "hard" inquiries.

Soft Inquiries

These inquiries occur when you or a company checks your credit report as part of a background check or for pre-approval purposes.

Soft inquiries do not affect your credit score and are typically associated with activities like checking your own credit report, pre-qualified credit card offers, or background checks by potential employers.

Hard Inquiries

Hard inquiries happen when a lender reviews your credit report as part of the decision-making process for credit approval.

These inquiries can affect your credit score but only temporarily and to a minimal extent.

Temporary and Light Impact of Car Loan Applications on Your Credit Score

When you apply for a car loan, the lender will conduct a hard inquiry to assess your creditworthiness. It's important to note that any impact on your credit score is very temporary and typically results in only a slight decrease in your score, often just a few points.

Here's why:

Lenders want to understand your recent credit activity, and hard inquiries reflect new credit applications.

A series of hard inquiries within a short time frame (like a few weeks) for the same type of credit (e.g., car loans) may be treated as a single inquiry by credit scoring models. This is known as rate shopping, and it's designed to account for consumers who are comparison shopping for the best loan terms.

The impact of a hard inquiry is usually minimal and brief. It might affect your credit score for a few months, but the effect diminishes over time.

Responsible Car Loan Shopping

To emphasize the minimal and temporary impact of car loan applications on your credit score:

• Do Your Research: Before applying, thoroughly research lenders and their loan terms to ensure they align with your financial situation.

• Apply Within a Short Timeframe: When you're ready to apply for a car loan, do so within a relatively short time span (a few weeks). This allows credit scoring models to recognize it as rate shopping.

• Know Your Credit: Be aware of your credit score and financial standing before applying. This can help you target lenders whose requirements match your credit profile.

• Apply Sparingly: Avoid submitting multiple loan applications at once unless necessary. Each hard inquiry can have a minor impact, so it's best to apply selectively.

It's Worth it for a Good Loan

Applying for a car loan may cause a temporary and very light drop in your credit score due to the hard inquiry conducted by the lender. However, it's essential to understand that this impact is both minimal and brief.

Successfully managing your car loan and making on-time payments can positively influence your credit over time, potentially offsetting any initial dip caused by the application process.

If you're ready for a car loan in Southern Ontario, we'd love to help! simply fill in the form below to get started.