Does applying for car finance affect your credit score?

Applying for car finance can affect your credit score, but how much depends on what kind of check is run and how many you stack up. One application on its own is a small event. Five in a fortnight is a pattern. The good news is that the order you do things in is within your control.

The short version

• Looking at your own file: no effect. It is not a lender enquiry.
• Asking for a quote: often no effect on the score, but it depends on the type of check, so ask first.
• A formal application: leaves an enquiry on your file and can lower the score a little.
• Many applications in a short time: can lower the score further, according to Consumer Protection.

Why an enquiry matters at all

A credit file lists who has looked at it and why. When a lender sees several recent applications, it can read them in two ways: that you are shopping around, or that other lenders have said no and you keep trying. It cannot tell which. Consumer Protection says many checks in a short period can suggest you are seeking more credit than you can afford, which is why the file is read that way.

Centrix says much the same: lots of enquiries for small loans or credit on your file can negatively affect your score. It also says that asking for your own report is not an enquiry, so checking is free of risk.

The types of check

You will hear several names. Here is what each means for you, as far as the credit reporters describe them.

What happens	Shows on file?	Used in score?
You order your own report	Not as a lender enquiry	No
A lender or broker asks for a quote	May show as a quotation enquiry (Equifax)	Equifax says not used
You make a formal credit application	Shows as a credit enquiry	Can affect the score
A broker sends your application to several lenders	Each lender that checks your file may leave an enquiry	Each can count

We have simplified this. Practices differ between lenders and reporters, which is why the most reliable move is to ask. Our page on the Equifax score explains the credit and quotation distinction in more detail.

A worked example

Here is an illustration with made-up dates. It shows enquiry counts, not score changes, because nobody can predict a score movement in advance.

Approach one: apply everywhere. On Monday a car yard runs a finance application. On Wednesday another yard does the same. On Friday you try an online lender. The next week a fourth lender. Your file now shows four credit enquiries in about ten days. Each lender sees the earlier ones.

Approach two: compare first, apply once. You order your reports and check them. You work out your weekly budget. You ask two or three lenders or brokers, in writing, which type of check they run for a quote and what the total repayable would be. You pick one, and make one formal application. Your file shows one credit enquiry, and you have still compared.

The second approach takes a few more days and a few more questions. It tends to leave a cleaner file for the lender making the real decision.

What to ask before anyone checks your file

Put these to every dealer, lender or broker:

• Will you run a credit check to give me a quote, and if so, is it a quotation enquiry or a credit enquiry?
• Does a quote commit me to anything?
• If you send my details to other lenders, will each of them check my file?
• When does a formal application start, and how will I know?
• Can I see the total repayable before the formal check?

A clear answer is a good sign. A dealer who says “it won’t affect anything, just sign here” is not answering the question.

Dealer finance and the form you sign

At a car yard the paper in front of you may be a finance application as well as a purchase form. Consumer Protection says it can cost more to get a loan through a dealership, and the Commerce Commission’s 2021 review found dealers often receive an introducer fee. Before you sign anything with a lender’s name on it, ask whether it authorises a credit check. If you did not mean to apply yet, do not sign it. Our bad credit car yards page covers what else to check there.

How long enquiries stay and how much they matter

The Credit Reporting Privacy Code limits how long credit reporters can keep each kind of item, and enquiries are on the list. Our page on how to check your credit score has the table. The time an enquiry stays on file is longer than the time it is likely to matter. Lenders pay most attention to recent activity, and an enquiry from years ago, with an on-time repayment record since, says little.

Missed payments and defaults weigh much more than an enquiry. If your score is low, the cause is probably something other than one application. The fix a bad credit score page shows how to sort the causes.

Other things that look like applications

Car finance is not the only thing that can add a line to your file. A new phone plan on a contract, a store card, a buy now pay later account or a utility connection can each prompt a credit check. If you are about to apply for car finance, hold off on those for a few weeks, unless you really need them. The aim is a quiet file at the moment a lender looks at it.

Joint applications deserve a note. If you apply with a partner, both files are checked, and both can carry an enquiry. Agree beforehand who is applying and what check will be run.

If you have already applied several times

It happens, especially when a car yard sends your details to more than one place. Do not panic, and do not apply again to make up for it. Order your reports and see what was recorded. If you spot an enquiry you did not agree to, contact the lender and the credit reporter, because an application should only be made with your consent. If it looks like fraud, you can ask for a 10-day freeze on your file, which Consumer Protection describes. Otherwise, give it a few weeks, build up on-time payments, and let the cluster age before you try again.

Step by step

1. Order your three reports and fix any errors.
2. Stop applying for other credit, including store cards and buy now pay later.
3. Work out your weekly budget and the car price that fits it.
4. Ask lenders or brokers about the type of check before they run it.
5. Compare the total repayable on any quote.
6. Make one formal application.
7. After a few weeks, order your report again to check what was recorded.

Checklist

• I know what is on my file today.
• I have not applied for other credit this month.
• I asked each lender what type of check they run.
• I have compared the total repayable, not the weekly payment.
• I have not signed anything at a dealer that I did not understand.

Red flags

Be careful of any site that offers “instant results” without telling you what check it runs, a dealer who runs a check before saying anything about price, or anyone who tells you not to worry about enquiries at all. If a lender declines you, you can ask for the main reason, which tells you whether an enquiry had anything to do with it.

If you are worried about the state of your finances, MoneyTalks offers free, confidential help on 0800 345 123.

Sources

• Credit checks, scores and history, Consumer Protection
• Request your credit report, Centrix
• Credit reports, Sorted
• Understanding your Equifax Score, Equifax
• Credit Reporting Privacy Code 2020, Office of the Privacy Commissioner
• Commerce Commission, motor vehicle financing and add-ons review (2021)

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