How Buyers Can Get a Pre-Approved Car Loan without Affecting Credit
When shopping for a new or used car, buyers might need to understand their financing options before they get their heart set on a specific model. Depending on a buyer’s financial circumstances and their credit worthiness, loan terms and monthly payments can vary.
Buyers may be hesitant to fill out loan applications or enter information to get pre-qualified because they worry that the process will impact their credit score. However, getting pre-qualified or pre-approved for financing won’t always affect a consumer’s credit score. Can buyers get a pre-approved car loan without affecting credit and, most importantly, their credit score?
The Difference between Getting Pre-Approved and Getting Pre-Qualified
Some dealership sites or car companies provide an easy online tool that lets buyers get pre-qualified or pre-approved for financing. While these two financial terms are technically different, some consumers may use them in the same context. What’s the difference between ‘pre-qualified’ and ‘pre-approved? Here’s what consumers need to know.
When a consumer wants to be pre-qualified for financing, they will need to submit some basic information including:
- Work history
- Contact Info
- Residence (including monthly mortgage or rent payments)
After all this information is submitted, the lender or company will show the consumer how much financing they might be able to secure and the associated monthly payments for these loan amounts.
Getting pre-qualified does not guarantee that the individual is approved for the financing; the process simply provides an estimate about the types of loans for which the individual might qualify.
Submitting information for a pre-qualification is not considered a hard credit inquiry. The individual isn’t agreeing to a loan, and the options presented to the individual are simply for informational purposes. Going through this process will not affect a credit score or show up on a credit report.
Experian explains that the prequalification process “…means the creditor has done at least a basic review of your creditworthiness to determine if you’re likely to qualify for a loan or credit card.”
Individuals can discover that they don’t qualify for any financing options. Experian notes that getting a rejection could help consumers avoid moving on to the next process and opting for a more thorough credit review.
The Pre-Approval Process
The pre-approval process is more involved. This is known as a ‘hard inquiry.’ For this process, more information will be requested of the individual. While a social security number might not be required to get pre-qualified, the pre-approval process will require this information.
Pre-approvals, since they are more involved, will affect the credit score. However, the ding will likely be minimal. The exception, however, is related to pre-approval processes for credit cards; Experian explains that credit card approvals are typically soft inquiries and don’t affect a credit score.
What Affects the Credit Score?
While hard credit inquiries—like some pre-approvals—can affect a credit score, an individual’s FICO score also is determined by other factors, too. Here are all the factors that go into how a credit score is computed:
- Payment history
- Balance amounts (or amount owed)
- Credit history length
- New credit
- Mix of credit
Consumers who pay their bills on time will reap positive rewards on their FICO score. Payment history has the most impact on an individual’s credit score. In fact, payment history accounts for 35 percent of the score.
One of the easiest ways to bump a credit score is to pay bills on time. Schedule loan payments or opt for automatic withdrawals if it’s easier.
The amount owed on all those credit cards, loans, etc. makes up the balance amounts. This is the second most impactful factor on the credit score. The balance amount accounts for 30 percent of the credit score.
Debt to credit ratio is part of the balance amounts. Maxed out credit cards might be a warning sign to banks, especially if there are multiple accounts that are hitting their limits. Consumers can pay down debt on credit cards or loans to help free up credit and have a better debt to credit ratio.
How long an individual has been extended credit also makes up part of their credit score. However, length of credit or credit history only accounts for 15 percent of the score.
The longer an individual has been extended credit, the better. However, consumers can build up this aspect of their score by keeping their credit active. MyFICO explains that the score averages the age of all credit, and not using certain accounts also could play a part in this aspect of the score.
A healthy credit mix can bump a score, too. A consumer who only has credit cards might not score as well on this portion of the score as those who have a mortgage, credit cards and a car loan, too.
The credit mix, though, only accounts for 10 percent of the FICO score.
MyFICO explains that taking multiple credit accounts in a short time period could ding the credit score. Yes, new credit is beneficial. However, securing multiple credit cards at the same time or within a few weeks might leave a sore spot on that FICO score.
Keep Tabs on the Credit Score
For consumers who might be searching for a new car, keeping an eye on their credit score could be helpful in determining options for loans. The Consumer Financial Protection Bureau assures consumers that requesting and reviewing their own credit report won’t hurt their score.
In fact, keeping tabs on that number could be beneficial. Reviewing a credit score and credit report can help consumers catch errors that could be hurting their credit. They also might see warning signs of identity theft, too.
Reviewing a credit score also could help consumers better understand their loan options. For example, those with really high scores can often secure better interest rates.
Reviewing a credit report might help consumers realize that their score is in the low range. This could prepare them for higher interest rates for auto loans or it may influence them to try to repair their score before trying to secure a loan.
Understanding the credit score can help consumers feel more empowered and also might help them make better decisions about loans and other financing options. Some consumers, though, might not know how those three-digit numbers translate. What is a good credit score?
Here is how the numbers translated into a consumer’s credit worthiness:
- 800+: Excellent
- 740 to 799: Very Good
- 670 to 739: Good
- 580 to 669: Fair
- 579 and Below: Poor
Consumers who want to review their credit report and check their score can do so for free once per year (from Experian, Equifax and TransUnion). To order a report, consumers need to contact the credit reporting bureaus. Credit reports can typically be ordered online.
Do Car Buyers Get Pre-Approved or Pre-Qualified for Financing Via Carzing?
Buyers who are using Carzing to find a new or used vehicle might also use the site to find financing, too. Do car buyers get pre-approved or pre-qualified for financing with Carzing?
Consumers can choose to go through the pre-qualification process, and this does not affect the credit score. To get pre-qualified, buyers will need to submit their work history, first and last name, contact information, birth date, information about their residence (monthly mortgage or rent amount), and information about their employment.
This data can help determine the financing for which the buyer might qualify. Getting pre-qualified via Carzing, though, does not mean that the buyer’s financing is guaranteed. Carzing lets buyers print out a voucher with all the information about their preferred financing option; this can be presented to a participating dealership.
In order to secure the financing that they want, buyers will need to complete a more extensive credit application. This process will impact the individual’s credit score, as it is considered a ‘hard inquiry.’
Carzing doesn’t require a buyer to include their social security number for the pre-qualification process. However, they can include this information for a more accurate assessment of their available financing options.
Carzing’s prequalification process can help buyers better understand their loan options. Carzing also will show buyers how much money will be expected for a down payment. Getting pre-qualified can help buyers take control of their financing options.
Buyers can better prepare for the pre-qualification and approval process by reviewing the credit score and their budget, too. Understanding how much a buyer can allocate towards a monthly loan payment can help buyers find cars that are within their financial means.
How much should consumers spend on a monthly car payment? According to NerdWallet, a car payment should be less than 10 percent of take-home pay. However, individuals who may have few financial obligations might nudge this recommendation up a bit.
A car payment should fit comfortably in a budget, and buyers also need to keep in mind that other costs also are necessary when buying a new car. Insurance premiums, fuel and even regular upkeep are all part of the cost of owning a car. In total, NerdWallet recommends spending less than 20 percent of take-home pay on the loan payment plus transportation expenses.
Although buyers shouldn’t worry about the pre-qualification process affecting their credit score, they can prepare for the process by reviewing their credit report to get a better idea of their creditworthiness. If a car buyer wants to move forward in securing a loan, they will need to fill out a credit application at a dealership for a more extensive credit check. This will impact their credit score, but that ‘hard inquiry’ could result in securing the loan, buying the vehicle, and, hopefully, making on-time car payments each month to help increase the credit score!