Does Getting Preapproved for a Car Loan Hurt Your Credit?

How Do Car Loan Preapprovals Affect Your Credit?

When you get preapproved for a car loan, the lender will initiate a hard credit inquiry. This will affect your FICO^® Score^Θ for 12 months, but most borrowers see their score dip by less than five points. What's more, most credit scoring models treat multiple hard inquiries on auto loans as a single inquiry if they occur within a short time period—typically 45 days, but 14 days with some scoring models.

Just be aware that if you move forward with a lender, your actual loan terms may be different if your financial situation has changed since getting preapproved. In extreme cases, your application could be denied altogether. That could happen if you've acquired new debt or experienced a change in income or employment.

Prequalification vs. Preapproval

Preapproval isn't the same thing as prequalification, though both provide a snapshot of your finances lenders can use to create a loan estimate. That allows you to compare loan amounts, interest rates and terms and can also give you leverage when negotiating your car loan.

Unlike preapproval, prequalification typically involves a soft credit inquiry, which does not affect your credit score. The trade-off is that the offer you receive could change, sometimes significantly, once the lender takes a deeper look at your credit during the application process. Preapproval is more involved than prequalification, which can result in a more accurate loan estimate.

Why You Should Check Your Credit Before Applying for a Car Loan

Since getting preapproved for a car loan typically requires a hard credit inquiry, it's in your best interest to check your credit and see where you stand. Every lender is different, but the best interest rates and loan terms often go to borrowers with a credit score of at least 661.

Your credit report is available at AnnualCreditReport.com. You can also get your FICO^® Score and credit report for free from Experian. You'll want to look over the following details:

• Your personal information
• Credit accounts and collections
• Inquiries
• Public records like bankruptcies

When reviewing your credit report, take note of anything that doesn't look right. That could be an account you don't recognize, an unusually high balance or an account that's incorrectly listed as late or delinquent. If you find information you believe is inaccurate, you have the right to dispute inaccuracies directly with each of the major credit bureaus (Experian, TransUnion and Equifax).

Learn more: What Is a Good Credit Score for an Auto Loan?

How to Improve Your Credit Before Applying for a Car Loan

Looking over your credit report can reveal opportunities to improve your credit before getting preapproved. Here are some simple steps that could go a long way:

• Continue making on-time payments. Your payment history accounts for about 35% of your FICO^® Score—and a single late payment can stay on your credit report for up to seven years. Consistently paying your bills on time is one of the most effective ways to maintain strong credit.
• Pay down your debt balances. The total amount you've borrowed makes up another 30% of your FICO^® Score. For revolving accounts like credit cards, focus on how much available credit you're actually using. This is your credit utilization rate. The lower this number, the less of a negative impact it can have on your credit.
• Avoid new credit inquiries. Remember that hard inquiries can negatively affect your credit score. Accumulating new debt can also stretch your finances, which might make lenders hesitant to approve your application. If possible, try to hold off on applying for new credit until after buying a car.

The Bottom Line

Getting preapproved for a car loan can slightly affect your credit, but it can also clarify your borrowing power and help you shop around for the best loan and interest rate. Paying your new car loan on time and keeping your debt balances on the lower side can help you maintain strong credit going forward.