Anuj Kacker, Co-founder, MoneyTap, a Bengaluru-based credit line firm, said that applying for loans to multiple lenders results in multiple inquiries for your credit report which may negatively impact your score. “Multiple credit inquiries are looked down upon by lenders as it is considered a sign of high credit risk, impacting the chances of getting loan approval. It is better to find out various product offerings and identify the right fit before applying for the loan,” Kacker explained.
So, what should one do if one wants the cheapest loan? The answer to this is that one must compare loan rates of multiple lenders smartly. However, before we discuss how to do that, you must understand the difference between hard and soft credit inquiries and how these impact your credit score.
Hard inquiries versus soft inquiries
Hard inquiry: Gaurav Aggarwal, Director, Unsecured Loans, Paisabazaar.com says, “Every time you apply for credit, lenders raise an inquiry with credit bureaus to evaluate your creditworthiness. Such lender initiated direct inquiries are termed as hard inquiries, and the bureaus can reduce your credit score by a few points for each inquiry about you that the bureaus get.”
According to credit bureau Experian, if you apply for credit, such as a mortgage, auto loan or credit card, the lender (with your permission) will check your credit report and credit score from one or more of the major credit bureaus. “Because these inquiries are tied to an actual credit application, they’re considered hard inquiries, and they can affect your credit scores,” it states on its website.
Here is how hard inquiries can impact your credit score according to the Experian website:
“Too many hard inquiries in a short period of time can be concerning to lenders. That’s because multiple hard inquiries may add up to numerous new accounts. Opening various new credit accounts may mean you’re having trouble paying bills or are at risk of overspending. As a result, hard inquiries have a temporary, negative effect on your credit scores.
Credit scoring models do consider the possibility that you’re rate shopping for the best loan deal available. Most will consider multiple inquiries for a certain kind of credit product, such as a car loan or a mortgage, in a short period as a single inquiry, which will have a smaller impact on your credit score than multiple, separate inquiries.
Hard inquiries remain on your credit report for just over two years and their impact on your credit decreases over time. Even if you have multiple hard inquiries in a span of just a few months, it’s still unlikely a potential lender will give them too much weight. Your history of on-time payments and a low credit utilization ratio are much more important to most credit scoring models and the lenders that use them.”
Soft inquiry: This is what the Experian website said about soft inquiries: “When you check your own credit report or give permission to someone like a potential employer to review your credit report, a soft inquiry occurs. Soft inquiries may also occur when businesses, such as lenders, insurance companies, or credit card companies, check your credit to pre-approve you for offers.
Because soft inquiries aren’t linked to a specific application for new credit, these inquiries have no effect on your credit score as they are never considered as a factor in credit scoring models. Soft inquiries are not disputable but are available for reference.”
What you should do
When you apply for multiple credit products in a short period each hard inquiry lowers your credit score as it projects you as a credit hungry consumer. Such consumers are often viewed as risky by lenders, which either makes lenders reject your credit application or approve it at a higher interest rate.
Instead of submitting multiple loan applications directly to lenders you should consider visiting online financial marketplaces for comparing loan options across a wide spectrum of lenders and choose the most suitable one to submit your loan application to. While such marketplaces also fetch your credit report to provide you with loan offers, these are soft inquiries, and don’t harm your credit score.
Adhil Shetty, CEO, BankBazaar.com said, “If you had to apply for multiple loans because your credit score was poor, your score would only get worse because the system disincentivises this behaviour. Therefore, when applying for a loan, do your research online. Compare loan options on parameters such as eligibility criteria, interest rate, and charges. Short-list your options to 3-4 but apply only for the one which suits your needs the best. While finalising your option, also consider whether you’re able to apply for the loans online, in a contactless manner, which is useful from the point of not having to step into a crowded branch office during the pandemic.”