Is Pre-Approval for an Auto Loan a Hard Inquiry?

Most of us don’t have piles of cash sitting around to use for an outright, point-of-sale car or truck purchase—especially when you consider that the average price of a new car exceeds $36,000. That’s why over 85% of new car purchases involve auto loans. The average amount of these loans? Around $26,000. 

Now, not all auto loans are the same. Neither are all potential borrowers or lenders. Luckily, there are ways you, as a hopeful borrower, can help improve your chances of securing the loan you need with terms you can live with. One such way to reduce the anxiety before you head out to the lot is through pre-approval for auto loans.

The benefits of a pre-approved car loan are wide-ranging. First, going through the pre-approval process helps you to zero in on the amount you can afford to spend/borrow, so you can shop with a solid budget in mind. That way, you can focus more on the car and features that you want, so you can negotiate and buy with more confidence.

In this blog, we’re going to look at a few of the most frequently asked questions around pre-approved auto loans, with a special emphasis on what impact, if any, the process can have on your credit score.

Do Pre-Approvals Hurt My Credit Score?

Getting pre-approval for an auto loan is a pretty routine process. As such, it’s not something you should expect to affect your credit score much—it certainly won’t wreck it. While yes, getting pre-approved for an auto loan does involve a “hard credit inquiry”, the impact on your credit score is minor. At most, the inquiry might knock your score down by a little bit, it’s not a major hit and it’s only temporary.

What happens if you want to shop around for rates by applying for multiple pre-approved loans at the same time, though? Thankfully, most credit scoring models account for a bit of a “shopping around” process and will treat multiple credit inquiries within 30 days, for example, as a single inquiry. This way, whether you apply for one or more loans, your credit rating is not going to rack up too many points throughout the process.

Can I Get a Pre-Approved Car Loan with Bad Credit?

Some lenders specialize in pre-approved car loans for individuals with bad credit. Generally, if you have bad credit you’ll have an easier time getting a car loan than you would if you were seeking a personal loan, since in the case of an auto loan the car itself serves as collateral (which can be repossessed if the borrower stops making payments). As you might expect, these loans typically come with higher interest rates, and may require you to make a larger down payment than someone with significantly better credit. If you’re concerned about how your credit might affect your ability to secure the loan you need, reach out to IMCU to discuss the options that may be available.

I Got Approved for a Car Loan! Now What?

After securing pre-approval, you’re ready to hit the car lot. Since you’ve gone through the pre-approval process, you can simply focus on finding the best car or truck for you—and your budget. Since this blog’s exploring the relationship between the pre-approval process and your personal credit score, let’s next dig into how the loan itself can impact your credit score.

How Much Will a Car Loan Drop My Credit Score?

Once you’ve agreed to the terms of an auto loan and made your purchase, there are a few different ways the loan itself—and how you go about paying it off—will impact your credit score. 

A number of factors go into determining your credit score. One of these factors is your credit history and the average age of active accounts. Taking on a brand-new loan will bring down the length of your credit history, amounting to what’s likely to be a very slight hit to your overall score. The more accounts you have, and the longer you’ve been paying them off, ultimately determines the impact. If you’ve been taking on loans and paying them off responsibly, you shouldn’t have too much to worry about!

Credit utilization is another component of your credit score, accounting for 30%. To put it in simple terms, credit utilization looks at how much debt you’re carrying and paying off per month as it compares to your credit limit. Because an auto loan doesn’t qualify as a “revolving” credit account, it won’t impact this piece of the equation.

On the positive side, there are ways that an auto loan can actually help your credit score. As long as you get in the habit of making on-time payments, for example, it should drive your score higher. 

Does Pre-Approval Guarantee a Car Loan?

It’s important to note that getting pre-approved for a loan is not the same as actually securing that loan. That being said, though, the rate should almost always be very close to the rate you’re actually presented with when you apply for the loan itself. This underscores the purpose of pre-approval, which isn’t to determine the exact loan rate and terms, but to provide a framework of what kinds of rates you’re likely to be approved for, when you apply.

Start with IMCU, a Lender You Can Trust

Getting pre-approved for an auto loan through a credit union—like Indiana Members Credit Union— makes the pre-approval process fast and free, and will enable you to shop with confidence. To get started, simply visit our online Loan Center, where you’ll also find an auto loan calculator and options to request loan information or find your nearest IMCU branch.