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(From the Financial Literacy Blog) – Getting ready to buy a new home or car? Considering getting a new credit card or personal loan? No matter what type of loan you are seeking, rate shopping can save you significant amounts of money.
Rate shopping is the comparison of rates offered by numerous lenders when taking out a loan. For example, vehicle purchases are a prime opportunity for consumers to rate shop. Aside from the cost of buying or renting a home, vehicles may be one of the most expensive purchases someone can make. Due to the high cost of vehicles, people often take out automobile loans. When someone applies for or inquires about an auto loan, they are authorizing the lender to ask for a copy of their credit report from a credit bureau. A credit report is a detailed breakdown of someone’s credit history and determines someone’s creditworthiness, or how trustworthy and likely they are to pay back their debts. When someone applies for a loan, credit bureaus sometimes slightly decrease the applicant’s credit score. This is because a loan request could be viewed as a risk to lenders. Credit scores drop when it’s considered a hard pull. If it’s a soft pull, like some prequalified loans, the score isn’t affected. To learn more about hard pulls vs. soft pulls, read this article.
If a loan inquiry has a negative impact on credit scores, should people shop around for the best rate on a vehicle from different lenders?
The answer is yes. People should shop around for auto loans from a number of different lenders. Some lenders offer better interest rates than others. An interest rate is the amount a lender charges for the use of funds expressed as a percentage of the original loan. The lower the interest rate, the less someone will pay over the life of a loan.
Doesn’t an auto loan inquiry lower the applicants credit score, though? If it’s a hard pull, yes, albeit slightly. Further, if someone makes a number of inquiries for a single purpose (such as searching for the best rates on an auto loan), some credit bureaus will only count multiple inquiries for the same type of loan as one. They recognize that the applicant is shopping around and only count the requests as one hard pull. However, just because the credit bureaus recognize someone is auto loan rate shopping, that doesn’t mean they have all the time in the world to find the best deal. The credit bureaus have an allotted time frame for rate shopping––usually between 14 and 45 days, depending on the bureau. To be safe, people who are shopping around for the best auto loan rate should try to fill out all their loan applications within 14 days.
To monitor your credit score, you can check your credit score from each of the three major bureaus once a year at this website. Pulling and reviewing your credit score before rate shopping also is good practice. If any errors appear, you can file a dispute.
For many, the assumption that multiple loan inquiries will each have a negative impact on their credit score has steered them away from finding the best deals. However, people should be taking advantage of the rate shopping time frame. Even a slightly lower interest rate can add up to big savings over the life of an auto loan, so it’s best to gather and compare several quotes from different lenders.
If you’re looking for competitive rates on an auto loan, contact your local credit union for help.