Looking to buy a new car? Whether you take the loan from the dealer or the bank, they're likely to need to look into your credit score to see if you're eligible for that loan. Or maybe you were approached by a lender with a tempting offer to take a loan and finance a new car? Would the check itself affect your credit score though? That's a legitimate concern, shared by many borrowers.
Generally speaking, pre-approval offers do not affect your credit score unless you actually follow through with the auto loan application. Pre-approvals are considered soft inquiries, which are seen only by the consumer – not other lenders. Read on to find out when hard inquiries are made and why these can in fact influence your credit score.
If you’ve gotten a pre-approval offer for an auto loan in the mail or your email inbox, there’s a good chance that the lender has gotten your information from a credit bureau. Credit bureaus like Equifax and Transunion will provide lenders with lists of consumers who have a credit score within a certain range. The lender will then reach out to the consumers on this list with auto loan offers that they are likely to qualify for based on this initial information. Clearly, this does not affect your credit score in any way.
While pre-approvals don’t impact your credit score, the hard inquiry, which occurs when you actually apply for the loan and the lender pulls your credit report, will have a slight impact. Hard inquiries have a minimal impact on your credit score, but too many of these inquiries can deter lenders from extending a loan offer. Since lenders can see these hard inquiries on the consumer’s credit report, they may sometimes deny a loan application because of too many recent inquiries. It’s important to note that hard inquiries will leave an individual’s credit report after two years.
Should you get pre-approved before looking for a car?
Pre-approval for auto loans is a great way to determine if you are a candidate for the loan. Since pre-approval offers are soft inquiries and don’t impact your credit, they can help lower your risk of rejection. Though pre-approvals are not guaranteed, they allow you to be more confident about getting a loan once you are ready to apply.
Pre-approval offers also help you better understand how much you can afford to spend before you start car shopping. Knowing how much you can feasibly spend on a vehicle based on your pre-approved offer empowers you to find cars within your budget. With a pre-approval, you can focus on finding cars that you can actually afford instead of wandering aimlessly around the lot of letting a salesperson talk you into a car that’s out of your budget.
A pre-approved offer for an auto loan can also give you some negotiating power. If you have preapprovals from multiple lenders, then you’ll be able to choose the offer that’s best for you. As an added bonus, you’ll have a little room to negotiate with the car dealership if they want to finance the car for you. They may be able to beat your best pre-approval offer.
Can you be denied a loan after pre-approval?
Yes, you can still be denied a loan after pre-approval. Pre-approval for an auto loan is more of an invitation to apply than it is a guarantee that you will be approved once you actually apply. The good news is that a pre-approval suggests that you are likely to be approved for the loan based on your meeting the minimum criteria. However, you still have to apply for the loan, and the lender will have to perform a hard inquiry – at which point they may not approve your application.
One of the main reasons why an auto loan may be rejected after pre-approval is because the individual’s credit situation has changed. For instance, the individual’s credit score may be lower when they apply for the loan then it was when the lender initially received their credit history information. If you are self-reporting credit and income information to get a pre-approval, then any mistakes you make in entering the correct information can also impact denial once you submit the actual loan application and the lender performs the hard inquiry.
To minimize your chances of being rejected for the auto loan after pre-approval, you will want to check your credit score from one or two of the major credit bureaus. If your credit score falls within the range that the lender is looking for, you have a good chance of getting final approval once you have applied. It’s important to note that you may also be approved for auto loans that you were not pre-approved or prequalified for.
What is the difference between pre-qualified and pre-approved?
According to the Consumer Financial Protection Bureau, there is not much of a difference between a pre-qualified and a pre-approved offer for an auto loan. Both of these documents state that the lender is tentatively willing to lend you a certain amount of money to purchase a vehicle based on certain assumptions. Neither is a guaranteed loan offer.
Consumer credit reporting company, Experian suggests that the difference is in how the lender gets the information that they base their prequalification/preapproval decision on. According to Experian, prequalification is when the consumer provides credit information to the lender, whereas preapproval is when the lender independently determines that the consumer meets their requirements.
It’s important to note that some institutions use “prequalification” and “pre-approval” interchangeably. This means that for these lenders, there is very little difference between the two in regard to requiring a credit check that can impact your credit score. However, the difference between a pre-qualified offer and a pre-approval will ultimately depend on the lender’s processes and definitions.
It’s imperative to check with the lender before undergoing the process, especially if you are concerned about a hard inquiry’s impact on your credit score. For instance, consider Wells Fargo’s prequalification and preapproval processes. Wells Fargo’s prequalification gives the borrower a rough estimate of what they qualify for without requiring a credit check, while their process for pre-approval involves a credit check, which is a hard inquiry and can impact your credit. That being said, neither the prequalification or the preapproval in this instance are a guarantee of an offer. The borrower will still need to submit an actual application to determine whether or not they are approved for the loan amount.