How Do Credit Inquiries for a Car Loan Affect Your Credit Score?

It’s exciting when you get the chance to shop for a new car. You can spend several days visiting multiple dealerships and test-drive the cars you love. In the digital age, you can also shop online, and with detailed vehicle history reports and photographs, you can feel comfortable with your choice and get your car delivered to your door. 

Despite all the benefits of modern car shopping, one thing to be careful about when buying a new car is applying for an auto loan. While it's good to shop around for a car, shopping for an auto loan can seriously damage your credit, so it’s best to exercise caution. 

What Is a Credit Report?

A credit report provides a detailed history of all the sources of credit you’ve ever had. This includes credit cards, loans, lines of credit, mortgages, and cell phone accounts. The report also shows a list of inquiries, which are all the times you’ve applied for credit as well as utility applications. An important feature of the report is your credit score; your score takes into consideration your sources of credit, length of credit activity, and your payment history. 

What Is a Good Credit Score? 

The two largest credit bureaus in Canada are Equifax and TransUnion, and they receive detailed reports on your credit activity. The credit scoring model for Equifax generally ranges from 300 to 900, with scores below 580 being very poor, 580 to 669 being fair, 670 to 739 being good, 740 to 800 considered very good, and scores above 800 being excellent. Ideally, you want to aim for scores above 740, as this is a healthy indicator of your credit standing, showing that you can use credit responsibly. 

What Happens When You Apply for a Car Loan?

When you apply for an auto loan, the lender will perform a credit check to assess your credit history. Based on your report, as well as your current income, they will decide whether or not to approve your loan application. However, the tricky part is that every time a lender performs a credit inquiry, it can have a negative impact on your credit report.

Why Do Credit Checks Affect My Credit Score? 

Too many credit checks can cause concern for financial institutions. This is why it’s important not to shop around for a car loan. If you go to multiple dealerships that all submit your application to a different lender, this will show up in the report. Each credit check can also knock a few points off your score. 

Can I Secure Car Financing with Bad Credit?

In an ideal credit situation, you have multiple sources of credit, show a record of consistently paying off your bills and loans, and have a good credit score. However, if you have a low credit score and are struggling with bad credit, it’s still possible to get approval for an auto finance loan. 

What Is a Bad Credit Car Loan?

While you may not be able to secure a loan with traditional lenders such as banks and credit unions, there are many non-traditional lenders who offer bad credit car loans. Bad credit car loans are designed specifically for people with bad credit. This includes newcomers to Canada, students, and individuals who have claimed bankruptcy or show a history of missed or late payments. 

Best Practices for Applying for a Car Loan

Understand Your Financial Situation

It’s always best to take stock of your financial situation before applying for a car loan. Many online banking apps allow you to check your credit score, so understanding where you stand will give you a realistic gauge of your ability to secure a car loan.

Do Your Research 

Most people are meticulous when doing their research on a used car, but it’s just as important to find a dealership with a finance department with expertise in this area. Choose a dealership you can trust with experience dealing with credit. 

Call around or drop by and have a conversation before applying for a loan. Let the advisor know that you’re concerned about multiple inquiries affecting your credit score and that you only want to submit your application to lenders that they know are likely to approve your loan. It’s also best to choose a dealership that works with multiple lenders so you can get the best loan terms. 

Keep Your Documents Handy

Before making a loan application, it’s best to prepare the essential documents. You’ll need a government-issued ID, such as an Alberta health care card or driver's license, to prove your identity. You should also bring in documents to demonstrate your financial standing, such as a letter of employment, several months' worth of pay stubs, and bank statements.

How Insta Auto Solutions Helps Preserve and Improve Your Credit Score

At Insta Auto Solutions, our aim is not only to get you into a really great used car you’ll love but also to help you build good credit. 

We Want to Know Who You Are

Securing a loan is not just about taking your ID and financial documents and making a loan application. It’s about understanding who you are, assessing your financial situation, and getting you into a loan that’s right for you. 

Working with a Range of Lenders

While we work with several lenders to give our customers a choice on where to secure a loan, we don’t make applications unless we know you’re likely to be approved. 

Strong Relationships with Lenders

We have extensive experience working with our lenders, so we know the best ones for your situation. Our finance managers have built strong relationships in the industry, so we often check in with our lenders and discuss your situation to assess your chances of securing a loan. 

Working to Help You Improve Your Credit

We work with you to improve your credit score and won’t do anything to damage it. We also take the time to explain your credit report to you and provide tips on improving your credit score. 

Tips for Maintaining and Improving Your Credit Score

If you suffer from bad credit, there’s no need to despair! There are several steps you can take to improve it. 

Get a Secured Credit Card

If you are struggling with bad credit, you may find it difficult to get approved for a credit card. One option is to get a secured credit card. This type of credit card is backed by a cash deposit that provides security to the card issuer in case you default on your payments. After you’ve proved you can manage your card responsibly, the lender will likely return your security deposit, and you should also see an improvement in your credit score. 

Put Your Cell Phone Bills in Your Name

If you are a student with a cell phone plan under your parent's name, one way to improve your score is to put the cell phone account under your name. Cell phone payments are reported to the credit bureaus, so this is a great way to demonstrate varied sources of credit and to show you can make your monthly payments. 

Get a Co-Signer on a Loan

While bad credit may affect your ability to get good loan terms, bringing in a co-signer with a very good credit standing can help. While you may be responsible for actually making the payments, the lender will view your cosigner favourably and offer you better loan terms with a lower interest rate. 

Pay All Your Bills on Time

As you find multiple ways to build your sources of credit, the last thing you want to do is damage your credit score by not paying your bills. If your resources are limited, create a budget and stick to it so you can make all your payments on time.

Get a Bad Credit Car Loan in Edmonton, Alberta

Bad credit car loans are a great way to build up your credit. Even though many of these loans come with a high-interest rate, you are not necessarily locked in for the entire loan term. When you’re diligent about making your loan payments, and you have at least a year’s worth of payments, your score will likely have increased. At this stage, you can probably refinance your car at a much lower interest rate. If you need an auto loan and are ready to start building your credit, come and visit our dealership today! Our finance experts make your overall financial health our top priority.