Looking for a new car can be an exciting time. You get to imagine yourself in the driver's seat of all kinds of vehicles and dream about the adventures you will take. However, you may worry that getting prequalified for your car loan will put the brakes on all your fun. While some credit checks may hurt your credit score, a loan prequalification usually won't. Before you send an application, be sure to understand how to avoid a ding on your credit.
Hard vs. Soft Credit Pull
Have you ever noticed junk mail that claimed you had been prequalified for a credit card or personal loan? Lenders use basic financial information like approximate income to determine prequalification status. They can get this information through a previous application or by other means. However, the lender never obtained permission from you for a hard credit pull, so they used what's known as a "soft pull."
A soft credit pull does not affect your credit. It's just how a lender prequalifies you based on basic information you provide. Pre-approval may require a more in-depth look, but it will still be a soft credit pull. If a lender asks for your signed permission to complete a hard credit pull, then that lender is going further than pre-approval. They shouldn't need that until you're ready to complete the loan application process.
When You Do Need a Hard Credit Pull
When it's time to apply for the car loan officially, you will almost certainly need to approve a hard credit pull. Luckily, there's no need to worry too much about this process. While the check may temporarily lower your credit score by a few points, the effect will be minimal. After you make a few payments on the loan, your score should go back to what it was. However, it's essential to make these payments on time each month.
The Truth About "Shotgunning"
One of the biggest myths surrounding credit scores and auto loans is that rate shopping with several lenders at once will hurt your credit more than it would if you were to inquire with only one lender. This practice of "shotgunning" multiple lenders to find the best interest rate is a common and smart practice. Though it is technically several hard pulls, your credit report will only show one pull if they all occur within a certain timeframe, typically 14 days.
This 14-day window gives you time to make sure you get the best deal possible, which is a sign of making sound financial decisions, not unfortunate ones. While some consumers apply for these loans on their own, others rely on the car dealer to use their network of lenders.
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