Shopping for a Loan? How to Find the Best Rate and Protect Your Credit Score

shopping for a loan

Rate shopping – it’s the responsible thing to do when shopping for a loan, right?

In reality, that answer is a bit more complicated than it seems. That’s because there’s a fine line between responsible rate shopping and taking an unnecessary hit on your credit score.

Here’s how you can tell the difference so you don’t end up crossing that line.

What happens when you’re shopping for a loan?

Did you know that your credit score could take a hit when you submit a loan application?

That’s because of something called a credit inquiry, which can occur with each application. There are two types: one type, a hard credit inquiry, affects your credit score. The other type, a soft credit inquiry, does not.

What’s a hard credit inquiry?

According to credit reporting agency Equifax, a hard credit inquiry occurs “when a lender or company makes a request to review your credit report as part of the loan application process.”

Therefore, if you apply for credit, there will be a hard inquiry.

What’s a soft credit inquiry?

A soft credit inquiry doesn’t happen when you’re submitting an application for credit. Therefore, it doesn’t affect your credit.

Credit reporting agency TransUnion describes a soft credit inquiry as “a more routine check that can be done without your permission.”

This type of inquiry happens when someone is checking your credit for other reasons. Experian, another of the big three credit reporting agencies, lists a few such reasons as such:

  • Pre-screened offers for credit.
  • Account reviews by your existing lenders.
  • Requests related to employment.
  • Requests for insurance purposes.
  • When you request your own credit report.

How do inquiries affect your credit score?

Essentially, applying for too many loans or lines of credit can make it seem as though you’re overextended and desperately need credit to meet your needs.

And since lenders naturally see this as a risk, these large amounts of hard credit inquiries can negatively affect your credit score.

How much does this affect your credit score? According to MyFico, it depends on your credit history:

“For most people, one additional credit inquiry will take less than five points off their FICO Scores. For perspective, the full range for FICO Scores is 300-850. Inquiries can have a greater impact if you have few accounts or a short credit history.”

No big deal, right? Well, as long as you don’t pull too many hard credit inquiries. Because when you hit that critical number, statistics start to hurt you:

“Large numbers of inquiries also mean greater risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.”

That said, it’s important to keep this in perspective, as inquiries are not the greatest factor in your credit score:

“While inquiries often can play a part in assessing risk, they play a minor part. Much more important factors for your scores are how timely you pay your bills and your overall debt burden as indicated on your credit report.”

In other words, your payment history and credit utilization are far more important. That said, the last thing you want is to lose out on a loan because you filed too many applications in search of the best interest rate.

So how can you make sure that doesn’t happen?

Can you protect your credit score while loan shopping?

Lenders know that putting in more than one loan application isn’t always an act of desperation. Rather, it’s a search for the best rate and terms.

So how can a lender tell the difference between “too many” hard credit inquiries and rate shopping? MyFico explains how:

“FICO scores ignore inquiries made [on mortgages, auto loans, and student loans] in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.”

That’s great for the first 30 days, right? But you still don’t want your credit score to take a hit after you’re finished rate shopping. If you do it right, it won’t:

“In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days. If your FICO Scores find some, your scores will consider inquiries that fall in a typical shopping period as just one inquiry.”

This typical “shopping period” can be as low as 14 days (when using older versions of FICO’s formula) or go up to 45 days (when using newer versions of the formula). The formula used depends on the lender checking your report.

Use shopping periods to your advantage

How can you maximize your rate shopping and loan application process to have a minimal detriment to your credit score? Shop fast and for the same amount.

If you apply for all the same types of loan (an auto loan, for example) and for the same amount ($20,000 for example), then that sends a clear signal that you’re rate shopping.

And, since you won’t be able to tell which model of the FICO score your lender is pulling, go ahead and try to keep it all within the shortest possible “shopping period” – 14 days.

Keep in mind that varying your loan amount or throwing a different type of loan into the ring (or worse, a credit card, which doesn’t fall into the same principles as loans) will result in another hard credit inquiry. Avoid doing this if at all possible.

In the end, if you shop for rates by applying for the same type of loans for the same amount within 14 days you won’t hurt your score. And if you find a lower rate by doing so, you’ll end up paying less over the life of your loan.

Interested in a personal loan?

Here are the top personal loan lenders of 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.