How to Get an Auto Loan Without Hurting Your Credit

Getting a loan can be a great way to build your credit. Making consistent and timely payments on a loan will steadily build your credit over the lifetime of the loan. But there’s a catch: applying for an auto loan can hurt your credit score.

So how can you reduce the risk of applying for an auto loan? Simple: get pre-approved before sending a formal application. Auto loan pre-approval can be your secret weapon to keep the process efficient, effective, and painless.

What is auto loan pre-approval?

First, it’s important to understand the two types of credit inquiries: soft and hard credit pulls.

What is a hard credit inquiry?

Every time you send a formal application for a loan, your lender sends a request to one or more credit bureaus to check your credit score. This is called a hard credit inquiry.

How do hard credit inquiries affect your credit?

Unfortunately, hard credit inquiries can hurt your credit score. That’s because a hard credit pull indicates that you’re about to open a new credit account. Submitting multiple consecutive hard pulls reveals that you’re applying for multiple loans. This might mean that you’re desperate for credit, or that you’re unable to pay your debts.

Of course, if you’re approved for a loan, your responsible payment behavior will help your credit far more than a hard pull will hurt it. But if your application is denied — or, worse, multiple applications are denied — your dropping credit score might make it harder to secure approval.

It’s a vicious cycle. The more you send loan applications, the more your credit drops, and the harder it becomes to get approved. And that damage will stay on your credit report for two years.

Note that there is an exception if you’re shopping around for a specific type of loan. If your inquiries are all for the same type of loan and are made within a short time span (typically 14 days), you won’t be penalized. These inquiries will all count as one.

What is a soft credit inquiry?

A credit check when you are not applying for a new line of credit is called a soft credit inquiry, or soft pull. For example, if an employer checks your credit, they’ll execute a soft pull. Soft credit inquiries do not affect your credit score.

Auto loan pre-approval is another example of a soft credit inquiry. But what is pre-approval?

What is auto loan pre-approval?

Pre-approval is a process wherein a lender evaluates your creditworthiness and estimates whether you are likely to qualify for a loan. If they decide that you are an eligible candidate, they’ll provide you with estimated rates and terms for your hypothetical loan.

Pre-approval is not a guarantee of approval. It is only a prediction of whether or not the lender is likely to approve your request. If you decide to take their offer, they’ll still need to perform a hard pull before approving your application.

That said, seeking pre-approval before formally applying is never a bad idea. It’s smart to know what kinds of rates and terms you might qualify for before submitting a hard inquiry. And if your pre-approval application is rejected, you can avoid sending a formal application, thus preventing the damage that a hard pull will incur.

How can you get pre-approved for a car loan?

From credit unions and banks to direct and marketplace lenders, many lenders offer pre-approval for car loans. Some examples are Autopay, Prosper, and LendingClub.

Before applying for any loans, you should do some research to find out who has the best auto loan rates. Once you’ve chosen your candidates, apply for pre-approval to find out whether they’re likely to approve your request. And never jump at the first offer that pre-approves you. Be patient and compare at least three different offers to find the deal that’s best for you.

Read this for more information about getting pre-approved.

Streamlining auto loan pre-approval

Want to streamline the process? SuperMoney offers a free auto loan engine that generates competing personalized pre-approvals in just a few minutes.

Just answer a few questions about your desired loan and your financial circumstances, and you’ll get offers from several leading lenders. And since these are soft pulls, the process won’t hurt your credit score.

Nobody wants to hurt their credit when shopping for an auto loan. Auto loan pre-approval can help you avoid needless hard pulls which could otherwise hurt your credit score for years down the line. Once you find the perfect loan, you can make your hard inquiry count!

Ready to start researching reliable lenders? SuperMoney can help!