Does Applying for a Car Loan Hurt Your Credit Score?
The short version
- Applying for a car loan involves a hard credit check, temporarily lowering your score.
- Hard inquiries typically reduce credit scores by 5 to 10 points, but this effect is short-lived.
- Multiple auto loan inquiries made in a short window are often considered as one by credit agencies.
- Checking your own credit report is free and considered a soft inquiry.
- Rate quotes and loan approval depend on various factors, including your credit profile and vehicle choice.
Applying for a car loan will involve a hard credit check, which can lower your credit score temporarily. However, you can manage this impact with some strategic planning.
What Are Hard and Soft Credit Checks?
A hard credit check happens when you apply for credit, like a car loan, and can reduce your credit score slightly. In contrast, a soft credit check does not affect your score and occurs during pre-approvals or personal credit reviews. Hard checks are visible on your credit report, while soft checks are not, according to LoanAgency.ca.
How Does a Car Loan Application Impact Your Credit Score?
A hard inquiry for a car loan typically lowers your score by about 5 to 10 points, according to Driverly.ca. This impact is usually minor and temporary. Additionally, if you shop for loans within a short period (14 to 45 days), credit agencies often treat these as a single inquiry. This clustering effect helps limit the negative impact on your score.
How Long Does the Impact Last?
Hard inquiries remain on your credit report for up to 3 years with Equifax and up to 6 years with TransUnion, reports the Financial Consumer Agency of Canada. However, their impact on your credit score typically fades much faster, often within a year. Over time, as you continue to make payments on time, your score can recover and may even improve.
How Can You Minimize the Impact on Your Credit Score?
There are several ways to reduce the impact of a hard inquiry on your credit score:
- Request soft credit checks when possible, especially for pre-approvals.
- Confine loan applications to a short timeframe to benefit from the single-inquiry treatment.
- Check your credit report for errors before applying for a loan. This can be done for free with either Equifax or TransUnion.
- Prepare your documentation and seek pre-approval to avoid unnecessary hard pulls.
According to LoanAgency.ca, these steps help manage how much a loan application impacts your score.
What Should You Know About Multiple Loan Applications?
Applying for multiple loans in a short period may not necessarily harm your credit score if done wisely. Use the clustering period to shop around for the best loan deal. According to Consumer Financial Protection Bureau, as long as all inquiries are made within a 14 to 45-day window, they are treated as a single hard inquiry for the same loan type. This strategy allows you to shop without an unnecessary decrease in your score.
Steps to Take Before Applying for a Car Loan
Before applying for a car loan, consider the following steps:
- Check your credit report for any inaccuracies and correct them.
- Gather necessary documents, such as proof of income and identification.
- Consider getting pre-approved with a soft check to understand what you might qualify for.
- Plan your loan-shopping within a timeframe to maximize benefits from the single-inquiry treatment.
FAQ
- Does a soft credit check affect my credit score? No, soft checks do not affect your credit score. They are used for pre-approvals and personal reviews.
- How many points can a hard inquiry lower my score? A hard inquiry can lower your score by approximately 5 to 10 points, but the impact is usually temporary.
- How can I improve my credit score after a hard inquiry? Consistently making timely payments and reducing your debt can help improve your credit score over time.
- What should I do if I find an error on my credit report? Contact the credit bureau to dispute any inaccurate information as soon as possible.
To find out more about how you can apply for a car loan, visit our application page.
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Sources
- Hard vs Soft Credit Check: What Canadians Need to Know | LoanAgency.ca (loanagency.ca)
- Hard vs Soft Credit Check: What's the Difference? (driverly.ca)
- How will shopping for an auto loan affect my credit? | Consumer Financial Protection Bureau (consumerfinance.gov)
- How long information stays on your credit report – Canada.ca (canada.ca)
This article is general information, not advice for your specific situation. Rules, rates, and requirements change, and they vary by province. Financing is always subject to lender approval. Confirm the details that apply to you with Auto Mall Loans before making a decision.