An application for credit or a loan, including auto loans, permits a potential lender to run a “hard” credit inquiry for the purpose of assessing a consumer’s credit risk. Since a hard credit inquiry appears on the consumer’s credit report and affects the consumer’s credit score, it is important to understand what happens to their credit report when a consumer applies for auto financing.
When a consumer seeks financing through an auto dealership, the financing may be done by the dealership itself or by a third-party lender. If the dealership is, itself, the lender, a credit application permits the dealership to pull a consumer’s credit one time. In this instance, the consumer should see a single inquiry from the dealership on their credit report.
If, however, the dealership does not provide financing itself but, rather, acts as a middleman to arrange financing through a third-party institution (i.e., a bank), a consumer’s single credit application essentially gives the dealership permission to “rate shop.” It is in a dealership’s interest to offer the best possible lending terms to incentivize a customer to purchase a comparably priced vehicle from them and not from the neighboring dealer, so rate shopping is quite common.
In order to offer the best possible financing terms, a dealership will collect rate quotes from multiple lenders in hope of offering the customer the best deal available. Each rate quote, however, requires the lender to run its own hard credit inquiry. Thus, a single auto loan application made to a single auto dealership can realistically trigger 10 to 20 (and possibly even more) hard credit inquiries on a consumer’s credit report.
Fortunately, the system does not punish consumers for trying to save a little money on their car loans. Credit score reporters, such as FICO and VantageScore, use algorithms designed to detect when credit activity resembles rate shopping. Under the rate shopping umbrella, all hard inquiries will be treated as a single inquiry for the purpose of calculating the consumer’s credit score, even inquiries that are initiated by multiple applications to multiple dealerships. As long the inquiries are made during a set timeframe—e.g., 45 days for FICO—the consumer’s credit score should only feel the affect of a single inquiry (e.g., up to 5 points for FICO).
An auto dealership may also perform a “soft” credit inquiry early in the shopping process to get an idea of whether a shopper will be able to secure financing and, if so, for how much. While a soft inquiry can be helpful for the dealership in navigating price negotiations with a particular consumer, a lender cannot rely on a soft pull and will require a second, hard credit check before approving an auto’s financing. Since a soft inquiry does not affect a consumer’s credit score, it will not show up on a consumer credit report as a second inquiry even if the consumer is not considered to be “rate shopping.”