Yes, a car loan is a hard inquiry. Hard credit inquiries will reduce your credit score by five points per inquiry for up to 90 days whether you are approved for the line of credit or not. The inquiry stays on your credit report for two years.
What is a Hard Inquiry?
Every time your credit report is requested by a lender a hard inquiry is placed on the report. The inquiry notes the date, name of the company that requested the report, and the type of inquiry (auto loan, mortgage, credit card, etc). The use of your credit report is only considered a hard inquiry if you are trying to obtain a line of credit. You may be wondering why this results in a slight dip in credit score. Basically, it’s to discourage consumers from applying for and taking on too much credit all at once. It’s best to keep your hard inquiries to no more than a couple each year.
Rate-Shopping and Credit Inquiries
However, when you are looking for a car loan, creditors and credit reporting agencies expect that you will try to find the best loan possible, so they expect you to shop around. If you apply for a loan for the same purpose multiple times within a 30 day period, most reporting agencies and lenders will lump all of those hard inquiries into one and only ding your credit score by a few points. So, instead of a five point per inquiry hit, you may only see a single five point deduction. For instance, you can apply for a car loan with multiple lenders/dealers in a short period of time, in order to find the best rate of interest, without worrying too much that you’re killing your credit. This is a fairly new development in the world of credit scoring, and it really came about as the internet has facilitated online “rate-shopping.” So don’t be afraid to apply for that auto loan you need!
Is There a Soft Inquiry? What is it?
Another question that many people have is about those ”free” credit scores that companies are offering. These are actually estimates of your credit score based on a soft inquiry. These are typical of background checks, credit pre-approvals, car and apartment rentals, utility account applications, and checking your credit yourself. Soft inquiries may be recorded on your credit history, but they do not reduce your credit score.