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Do Multiple Car Loan Applications Hurt Your Credit in Canada?

Posted by on Jul 05, 2024 - Archived under Uncategorized

When you’re in the market for a new car, the excitement of finding the perfect vehicle can quickly be overshadowed by the complexities of securing a car loan. One common question that arises is: “Do multiple car loan applications hurt your credit?”

 

This concern is understandable, as your credit score is a crucial factor in getting a good loan rate. Let’s break down this issue in a simple and easy-to-understand way.

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Understanding Credit Inquiries

When you apply for a car loan, the lender will perform a credit inquiry to check your credit report. There are two types of credit inquiries: hard inquiries and soft inquiries.

 

Hard Inquiries: These occur when a financial institution checks your credit report as part of their decision-making process. Hard inquiries can slightly lower your credit score temporarily.

 

Soft Inquiries: These happen when you check your own credit or when companies do a background check without your knowledge. Soft inquiries do not affect your credit score.

 

The Impact of Multiple Hard Inquiries

So, do multiple car loan applications hurt your credit? The short answer is: it depends on the timing and the number of inquiries. When it comes to multiple hard inquiries, the effect on your credit score can be marginal, especially in Canada.

 

Here’s how it works:

 

Rate Shopping Window: Credit scoring models like FICO understand that consumers often shop around for the best loan rates. Therefore, multiple inquiries for the same type of loan within a short period are typically treated as a single inquiry.

 

This period, known as the “rate shopping window,” is usually 14 to 45 days, depending on the credit scoring model used. During this window, you can apply to multiple lenders without each inquiry significantly impacting your score.

 

Slight Score Impact: Each hard inquiry can lower your score by a few points. However, if you make all your car loan applications within the rate shopping window, the combined impact on your credit score will be minimal.

 

Specifics for Canadians

For Canadians, the effect of multiple car loan applications on your credit score is marginal. Canadian credit bureaus, such as Equifax and TransUnion, follow similar principles to those used in the U.S. Here’s what you need to know:

 

Equifax Canada: Equifax Canada considers multiple inquiries for the same type of loan within a short timeframe as a single inquiry. This practice helps ensure that your credit score isn’t unduly penalized for shopping around.

 

TransUnion Canada: TransUnion also has mechanisms to account for rate shopping. If multiple inquiries are made within a short period, they are often grouped together, minimizing the impact on your credit score.

 

Tips for Minimizing Credit Score Impact

While the impact of multiple car loan applications on your credit score is marginal, it’s still wise to approach the process strategically. Here are some tips to help you minimize any potential negative effects:

 

Time Your Applications: Try to submit all your car loan applications within a short period, ideally within the 14- to 45-day rate shopping window. This helps ensure that multiple inquiries are counted as one.

 

Check Your Credit Report: Before applying for a car loan, check your credit report for errors or issues. Correcting any inaccuracies can improve your credit score and increase your chances of getting a better loan rate.

 

Limit Unnecessary Inquiries: Avoid applying for other types of credit (like credit cards or personal loans) while you’re shopping for a car loan. This helps keep your number of inquiries low.

 

The Difference is Minimal

Do multiple car loan applications hurt your credit? The impact is generally minimal, especially if you time your applications within the rate shopping window. For Canadians, the effect is particularly marginal due to the practices of Canadian credit bureaus.

 

By understanding how credit inquiries work and following strategic tips, you can shop around for the best car loan rates without significantly hurting your credit score.

 

So, go ahead and find that perfect car! Just remember to keep your loan applications within a short timeframe, check your credit report for accuracy, and limit other credit inquiries during your car shopping journey.

 

With these steps, you can secure the best loan rate with confidence, knowing that your credit score will remain strong.

 

If you’re ready for a car loan, we’d love to help! simply click here to get pre-approved online today.

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