Getting a Car Loan Without Hurting Your Credit

There are numerous reasons to get pre-approved for a car loan. Not the least of which is knowing beforehand whether you can buy and afford the car you want and need. Pre-approval also means that you’ll have an easier time at the dealership when purchase negotiations begin. It will give you some power over those negotiations, as the dealership will now be obligated to find a loan that's better than yours or sell without getting the loan credit they often depend on for profit.

Getting pre-approved can be good or bad for your credit, however, depending on how you go about it. The trick isn’t to get pre-approved first, but to get pre-qualified first. Here we’ll explain why that is, what it means for your credit, and how to get it done correctly.

Does a Car Loan Hurt Your Credit?

Generally speaking, a car loan is not bad for your credit. It’s usually a good thing. The exception, of course, being if you miss payments, go deeply underwater on the loan, or if the loan payment is a large portion of your income.

Your car payment should never be more than a quarter of your income. For example, if you make $3,000 a month, your car payment should not be more than $750. The higher your car payment is above your income’s 25 percent mark, the more it will negatively affect your credit. There are exceptions to this rule of thumb, but it’s better not to assume you are one of those exceptions. An ideal loan amount is much less than 25 percent of your monthly income.

Bear that in mind while shopping for loans. Unless you have platinum-perfect credit, you are likely to rely on your credit rating, so try to keep it as high as possible, to get good loan terms.

Read more about Average Auto Loan Rates here.

Compare Loan Rates and Save

Don't settle for dealer financing, get loan quotes from multiple providers

Powered By:

Getting Pre-Approved (Prequalified) Without Affecting Your Credit

If you know your credit score is above 700, it's likely you can find out what your interest rate on a new or used car purchase will be. If your credit score is closer to or over 800, you will definitely get the lowest rate banks, credit unions, and auto lenders are offering. If this is the case for you, skip ahead to getting a pre-approved loan and don’t worry about the hard credit check it will entail as you already know you’ll get the loan.

If that does not describe you, you’re not alone. Most of us don’t have stellar credit scores. Maintaining a high score is not easy and even small life events can greatly affect your score. So don’t sweat it. Instead, let’s look at how you can prequalify to find out your score and your likely interest rate so you can calculate payments before getting a hard credit check and gaining a loan.

Hard vs Soft Credit Inquiries

The first thing to know is that there are two types of credit inquiries made to get your credit score. The most common is a “hard” inquiry, which pulls your credit and alerts the credit bureaus that you are looking for a loan. This can be just fine, if you only have one or two inquiries, they are for the same thing, and they happen within a short amount of time (roughly a week or two). If a loan comes from one of those inquiries, the inquiry itself usually gets forgotten as it has far less impact than the actual loan being approved.

Soft inquiries do not pull full credit reports and usually do not alert the credit bureaus that you are searching for a loan. Soft inquiries can give a lender your likely credit score, thus allowing loan estimates to be made. They have their limits and are not a guarantee of a loan, but they do give both you and the potential lender a good idea of how likely you are to qualify for the loan they are offering.

Most soft inquiries happen as a result of background checks for jobs or apartment rental, for insurance reasons, or in order for a lender to get an idea of your actual financial situation. A soft inquiry can also give you pointers as to what you might do to improve your score before going for the hard loan check. Sometimes a credit score improvement of just 5 or 10 points can mean hundreds in savings over time as interest rates drop.

Getting Prequalified

Many lenders, including some credit unions, many banks, and auto loan specialists offer pre-qualification checks. It’s already popular among credit card lenders, who use it to send offers to potential clients and to give free credit monitoring services for current clients. Chances are, if you already have access to a credit monitoring service such as CreditWise, Experian, or LifeLock, you should be able to find out your credit score and may even be able to improve it with some of the tips they’ll offer.

Another way to prequalify is to pull your credit reports yourself. The Fair Credit Reporting Act requires that the three credit bureaus (Equifax, TransUnion, and Experian) provide you with a free credit report once a year. You can request, download, and print those reports and use them for pre-qualification at any lender or dealership. You can also pay an extra fee when pulling those reports to find out what that bureau gives you as a credit score. Some lenders use only one of the bureaus for their credit checks while others use a combination of the three, or an average.

Once you know your credit score, you can check loan calculators online to get an idea of what your interest rate is likely to be for a new or used car. Or you can go to a car dealership or potential lender, tell them what you know and what your score is, and find out what they’d offer based on that current data.

With that information in hand, you’ll know the likely interest rate you'll be offered and have a good idea what your loan repayment will be like. If you can afford the loan, then take the next step for pre-approval.

Where To Get Pre-Approval

To help you along, we’ve compiled a list of automotive lenders who offer pre-qualification via soft credit checks. Always make certain to do your own research to find the direction that is right for you.

  • Auto Credit Express - specializing in low or bad credit situations, this lender often works directly with dealerships and retains a high reputation for fairness and customer service.

  • Car.Loan.Com - has same-day approval options and often partners with dealerships for bad credit loan situations. Good customer service ratings are this company’s top selling point.

  • Capital One Auto Loan - a consumer-direct lender that is part of the Capital One network, this company offers pre-qualification with soft credit checks, as well as a full suite of online services for ease of prequalification and payment.

  • CarFinance - specializes in working directly with consumers to find an auto loan to meet their purchase and financial needs. Pre-approval is a large part of their service and loans are offered to anyone with a credit score of 525 or higher.

  • LendingTree - a lending network of loan partners, this aggregator will do a soft credit inquiry to find matches and then offer one hard inquiry to get multiple offers from various lenders for you to shop from.

  • myAutoLoan.com - a loan aggregator, this company usually starts with a soft inquiry into your credit and then shops lenders to find good matches for you. These are presented and hard inquiries are made with those you choose.

Compare Loan Rates and Save

Don't settle for dealer financing, get loan quotes from multiple providers

Powered By:

Getting a Car Loan on Bad Credit

If your credit is not very good (sub-650), you will need to do more work to get your car loan for purchase. Luckily, we’ve covered that separately and you can find out more by reading our article on Bad Credit Auto Loans here. Things are probably not as bad as you think.

Read more on the 7 Best Auto Loans here.

Read more on 10 Common Mistakes to Avoid When Getting an Auto Loan here.

FAQ

How can I prequalify for a car loan without hurting my credit?

Soft credit inquiries are offered by many lenders in order to see if you can get a loan and what the terms are likely to be. There are several ways to have a soft inquiry made. See above.

How much does your credit score drop when you get a car loan?

Usually it won’t drop at all, but if the loan terms are not very good or the payment is very high (compared to your income), your credit score could potentially take a hit. Unless a lot of credit inquiries have been made against your credit, your credit score should stay the same or even improve upon approval for an auto loan.

Does taking out a car loan hurt your credit?

No. Usually it improves your score, as long as you make all your payments on time, every single month. There are exceptions, of course, such as when the loan’s repayment is a significant portion of your income or when it raises your debt to available credit ratio.

How long does it take a car loan to hit your credit?

Usually about 15 days.

How does pre-approval help in getting a car loan?

The pre-approval process not only guarantees that you’ll be able to buy a vehicle under terms you can afford, but it also means that the car dealership you buy from is likely to try to beat your loan’s terms by finding another lender with a lower interest rate or better repayment terms. Dealerships do this because they get credit for finding the loan, increasing their profit on the sale.

Editor's note and disclaimer: Car Talk is supported by our fans, readers and listeners. When you click on some of the links on our website, we may receive referral compensation. However, you should know that the recommendations we make are based on our independent editorial review and analyses.