Rate shopping is a way to minimize the impact on your credit score when you're looking for your ideal auto loan. It's done by applying for multiple car loans within a short window of time. This can get tricky if you have bad credit. Never mind finding an ideal loan – first, you have to find a lender!
What Is Rate Shopping?
Rate shopping is applying for multiple loans for the same thing in order to compare rates and terms to find the loan that makes the most sense for you. The key to rate shopping is in the timing – if you group all your applications into a 14-day window of time you can minimize the impact on your credit score.
Whenever a lender looks at your credit reports and score while considering you for loan eligibility it's called a hard pull. Each hard pull impacts your credit score a little, usually only around five to 15 points for up to 12 months.
When you're looking for an auto loan, you actually have to apply in order to find out what a lender may offer and see what you qualify for. If you take your time looking for a car loan and spread out several applications over a few months, each one of those could drop your credit score. However, if you put out all your applications within 14 days of each other, the credit bureaus recognize that you're shopping for one loan, and only one pull will impact your score (even if five lenders pull it in two weeks).
ACE Tip: There's more than one credit scoring model used in the U.S., FICO and VantageScore are the main credit models. Most auto lenders use FICO, which has a longer rate shopping window of 30 to 45 days. However, since there's no way to know which scoring model a lender uses, it's best to stick to a 14-day rate shopping window used by VantageScore.
How Credit Impacts Your Auto Loan
It can be a good idea to rate shop with poor credit because bad credit borrowers typically qualify for higher interest rates. A higher interest rate or a longer loan term could mean adding a lot of money to your loan costs if you don't get a good deal from the start.
Since auto loans are typically large and last for a while, it’s worth it to take your time. Being able to apply for multiple loans to see which lender can offer you the lowest rates could save you hundreds or thousands of dollars depending on the size of the loan.
Since interest rates are mostly based on credit score, it's a good idea to know where your credit stands before you begin applying for a car loan as well. The better your credit score the lower the interest rate you're likely to qualify for. For those with bad credit, doing research on the average interest rates for people in similar situations can help you see when you're getting a better deal.
Why Rate Shopping is Tough With Bad Credit
Rate shopping can be hard as a bad credit borrower because car loans are a little harder to come by. Not all lenders work with people who have credit challenges, and not all lenders that do work with them are easy to pick out of a crowd. Often, rate shopping is easiest if you're applying for a direct loan through a bank, credit union, or online lender. Traditional lending institutions can be easy to find and apply with.
Borrowers with poor credit scores may not qualify for these loans, though, which means you're putting in multiple loans only to face auto loan turndown. As someone who has a credit score around 660 or below, it may be easier to acquire the car loan you need by working with an indirect lender.
These third-party lenders include independent financing lenders, subprime lenders, and the captive lenders of some automakers. To apply for one of these loans you typically need to apply directly with a dealership. You could face running into the same problem though if you don't know where to go. Luckily, we do.
Are You Ready for Your Next Car?
Here at Auto Credit Express, we know where to go when you have credit challenges! If you're unable to rate shop because you keep getting turned down by traditional lenders, we want to point you toward the special finance dealership that has the lenders you're looking for. Let us help you find a dealer in your area that works with credit-challenged consumers by filling out our fast, free auto loan request form. There's never any obligation to buy or cost to you, so get started right now!