If you’re like many Americans, you probably don’t give your credit scores too much thought until the time comes to make a major purchase, such as a car. If you plan to finance your new car rather than pay in cash, you will have to undergo a credit check. Whether that credit check is conducted by the dealership or a separate lending institution depends on who finances your auto loan.
No lending institution wants to offer you an auto loan if you aren’t likely to pay it back. To ensure that you are likely to repay what you borrow, prospective lenders pull your credit reports and review your past accounts and payment histories.
You have the option to finance your new car through the dealer. If you do so, the dealer runs your credit scores through a computer system that “shops” your loan around to different lenders. The better your credit scores, the more likely it is that one of the dealership's lending partners will agree to finance your purchase. If you finance your purchase with a bank rather than the dealership, however, the dealership does not have to pull your credit.
While financing your new car through the dealership is convenient, it doesn’t guarantee you’ll get the lowest rate you qualify for. If a dealership can get you to agree to a higher interest rate than you’re approved for, the company pockets the difference . According to a report by the Center for Responsible Living, consumers paid out an extra $25.8 billion in dealer interest rate markups just from car loans made in 2009 alone.
Shopping around for the best rates is more time consuming than merely accepting the dealer’s financing, but it could save you hundreds – or even thousands – of dollars in interest charges over the life of the loan.
There are two types of credit checks: soft pulls and hard pulls. A “soft” pull does not affect your credit rating while a “hard” pull lowers your credit score by several points. Businesses that pull your credit rating as part of a financial transaction, such as a car dealership, conduct a hard pull. Although numerous hard pulls within a short time frame can hurt your credit rating, the FICO scoring system treats rate shopping differently. All inquires that occur during a 45-day period when rate shopping count as a single hard pull. Thus, you can shop banks, credit unions and dealerships for the best auto finance rate without worrying that your credit scores will suffer as a result
If you’re nervous about your credit scores and what the dealership or bank may see on your credit report, you can review your own credit report ahead of time for free. Federal law gives you the right to pull and review a free copy of your credit report once each year from each of the three major credit bureaus. Pulling your credit well ahead of time ensures that you have the chance to examine your history and fix any errors that appear on your report before applying for auto financing.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.