Zero percent. That’s the amount of interest you could pay for an auto loan on certain makes and models if you have good credit reports and credit scores. Even if you can’t qualify for zero percent interest rates for auto loans, mortgages and credit card interest rates are also at historic lows. It’s a good time to be on the borrower’s side of the credit equation.
Finding these highly competitive interest rates on loans isn’t as simple as calling your neighborhood bank, though. You’re going to have to search for the best deal available and that means rate shopping. Thankfully the process isn’t as overwhelming as it sounds.
Why Rate Shop?
No two lenders assess applicant risk the exact same way. And, because there are three major credit reporting companies, each with slightly different credit report data, it’s unlikely that different lenders are going to get the same numeric credit score for any given applicant. Furthermore, on the off chance that lenders did get the same score, it’s unlikely that they would interpret that credit score the same way.
For example, Bank A might target borrowers with very high credit scores, and be willing to accept smaller down payments. Bank B might set its sights on consumers with somewhat lower (but still prime) credit scores, so it can charge relatively higher interest rates. Finally, Bank C might be most comfortable with subprime lending, and focus exclusively on consumers with lower credit scores. As you might expect, Bank C might offer better rates to subprime borrowers than lenders who specialize in lending to consumers with higher credit scores.
The only way you’d know for certain what kinds of “deals” you’ll get from each lender—particularly if you have a lower credit score—is to prequalify for a loan with each of them.
Your goal when rate shopping is to end up with the best possible deal. That means low or no interest in this environment. You’ll be making payments for years or even decades on your loans, so being diligent about finding the best interest rate means real savings in your pocket each and every month.
But What about Credit Inquiries?
A credit inquiry, also referred to as a “hard inquiry,” is a notation on a credit report indicating that it has been accessed by a lender for the purpose of possibly extending credit. A credit inquiry is made up of three components: the date of access, the name of the company requesting the score and a code defining the kind of business that made the inquiry.
Credit inquiries can have a negative impact on credit scores, but that’s not an absolute. In fact, the VantageScore model considers credit inquiries to be less influential than other credit report factors like payment history and your amount of debt. And an inquiry can reduce your credit score by between five and 10 points, but that decrease can be made up in as little as three months. Still, it’s a good idea to be cognizant about the impact multiple credit inquiries can have on credit scores.
It’s a fact that interest rate shopping will result in multiple credit inquiries, but don’t let that stop you.
The VantageScore credit scoring model includes logic that allows consumers to shop around for the best deal they can find while not allowing all of the credit inquiries to lower your score. The model incorporates a 14-day rolling window where it will treat multiple inquires from mortgage or auto lenders as a single search for credit. It excludes utility inquiries entirely.
For example, if you have three mortgage-related inquiries within the same 14-day window, a VantageScore credit score will treat them as a single inquiry rather than three inquiries. The theory is that you’re not looking for three loans but are instead looking for one loan but with the best terms. Treating the multiple inquiries as a single inquiry better reflects how many loans you’re actually going to take out.