Understanding credit checks for car finance

When looking at financing a used car, your credit history plays a major role in determining whether you are approved, and on what terms. 

Car finance lenders use different types of credit checks to assess your financial situation, creditworthiness, and ability to manage repayments. In this guide, we’ll explain the types of credit checks, such as soft and hard searches, that may be completed during your HP car finance application.

What are credit checks? 

A credit check is a review of your credit history that lenders use to assess how well you manage your finances. 

When you apply for car finance, lenders want to make sure you can handle the repayments on the loan. To do this, they look at your past credit behaviour, including how much debt you have and whether you’ve made payments on time. This helps them decide if you are a reliable borrower.

Credit checks are not a bad thing - they help protect people from borrowing money they would struggle to repay.

There are two main types of credit checks that might be completed during the application process:

Soft credit checks

A soft credit check is a basic review of your credit. It’s often used when you’re inquiring about a loan or checking if you’re eligible for car finance. This type of check does not impact your credit score and isn’t visible to other lenders.  It allows lenders to quickly determine if you meet the initial requirements for a loan without leaving a record on your credit report.

Hard credit checks

A hard credit check is a more thorough review of your financial history. A hard credit check for car finance typically happens when you submit a full application. 

Unlike a soft check, a hard check can slightly reduce your credit score, as it signals that you’re actively seeking credit. It also leaves a record on your credit report visible to other lenders. 

If you have multiple hard searches within a short period, it may signal to lenders that you’re struggling to get approved for credit, which could affect future applications.

Understanding the difference between these two types of credit check can help you make informed decisions when applying for car finance. Soft checks are useful for exploring options without impacting your credit score, while hard checks are necessary for final loan approval and may have a minor effect on your score.

Before submitting an application, it’s a good idea to find out which type of credit check will be conducted. This helps you manage your car finance applications and avoid any surprises.

How credit checks affect your car finance application

Both soft and hard credit checks play a crucial role in the car finance application process. Below, we explain how these checks work and how they influence the lender’s final decision on your car finance application.

Eligibility stage: Soft credit checks

At the pre-approval stage of a car finance application, most lenders perform a soft credit check to assess your basic eligibility. This check provides lenders with a snapshot of your creditworthiness without impacting your credit score. Soft credit check typically review:

• Basic personal details: Your name, address, date of birth, and sometimes employment information.
• Credit score: A general snapshot of your credit score, helping lenders assess your creditworthiness.
• Credit accounts: Information about your current and past credit accounts, such as loans, credit cards, and mortgages.
• Payment history: Whether you’ve generally made payments on time, though detailed payment history may not always be visible.
• Outstanding debt: The total amount of debt you currently owe across all accounts.
• Public records: Any significant financial issues like bankruptcies or county court judgments (CCJs).
• Recent soft credit enquiries: While these are visible to you and the lender performing the check, they are not visible to other lenders.

Soft credit checks for car finance applications enable lenders to offer applicants pre-approval for lending or conditional acceptance of an application. It helps determine if you meet their criteria based on some basic information. 

It is important you are accurate with the details you give. A car finance application could still be declined, if any details entered are incorrect, or if additional checks are needed.

Benefits of a soft credit search 

• No impact on your credit score: Soft checks don’t affect your credit rating, so you can explore your car finance options without any risk to your credit profile.
• Pre-approval and comparison: Soft checks allow lenders to determine if you meet the initial requirements for car finance, helping you identify the best options before making a full application.
• Confidentiality: Other lenders cannot see soft searches, making it a worry-free way to shop around for car finance.

Using soft credit checks allows you to compare lenders and finance deals confidently, knowing your credit profile remains unaffected and private. Always ensure the information you provide is accurate to avoid any issues later in the application process.

Application stage: Hard credit checks

When you apply for car finance, some lenders will carry out a hard credit check once your application is submitted. 

This is a detailed review of your credit history and financial situation, enabling the lender to make an informed final decision about approving your application.

What lenders see in a hard credit check:

Comprehensive personal details: Your name, address history, date of birth, employment information, and sometimes income details.

• Full credit score: A full analysis of your credit score to assess your risk as a borrower.
• Complete credit history: A thorough record of your current and past credit accounts, including credit cards, loans, mortgages, and any finance agreements.
• Payment history: Detailed information on your payment patterns, including any missed, late, or on-time payments.
• Outstanding debt: A clear breakdown of your existing debts, including how close you are to your credit limits (credit utilisation).
• Credit utilisation: The percentage of your available credit currently in use, which can influence your approval chances.
• Public records: Information about adverse financial events, such as bankruptcies, defaults, or court judgments that may affect your creditworthiness.
• Recent credit enquiries: A list of recent inquiries by other lenders, which can indicate whether you’re actively seeking credit.

This detailed review helps lenders ensure you can manage the financial commitment of car finance. While hard credit checks provide the necessary assurance for final approval, it’s important to understand that they can impact your credit score slightly.

Considerations of a hard credit search

Impact on your credit score: Unlike soft checks, hard credit checks are recorded on your credit report and may lower your credit score slightly, typically by a few points. This is because they signal to other lenders that you are actively seeking credit.

• Detailed review of your credit history: A hard credit check provides a complete overview of your financial background, such as existing loans, missed payments, and your credit utilisation ratio. This helps lenders determine whether you can manage the additional responsibility of car finance repayments.
• Required for final approval: A hard credit check is a critical step in finalising your car finance application, as it gives lenders the confidence to approve your loan.

By understanding when and why a hard credit check is conducted, you can better prepare for the process and ensure you’re ready for the final stages of your application.

Multiple car finance applications

It’s important to manage the number of finance applications you make, as multiple hard credit checks for car finance or other borrowing in a short period can lower your credit score and make it appear as though you're struggling to obtain credit. To avoid this:

• Limit the number of applications: Instead of applying to several lenders simultaneously, use pre-approval tools that perform soft credit checks. These tools let you check your eligibility for car finance without affecting your credit score, enabling you to compare options risk-free. This way, you can shop around confidently without harming your credit profile.
• Leave time between applications: If you decide to apply to more than one lender, be strategic about the timing. Submitting multiple applications in quick succession can trigger several hard credit checks, which may reduce your credit score and weaken your overall profile. Allowing time between applications helps minimise this impact, protecting your score and increasing your likelihood of securing the best finance deal.

By managing your applications carefully, you can maintain a strong credit profile, making it easier to gain approval for car finance on favourable terms in the future.

Improving your credit history before applying 

If you know a credit check for car finance is on the horizon because you’re planning to buy a car soon or need finance, improving your credit history beforehand can significantly boost your chances of approval. A strong credit profile can also help you secure better interest rates.

Here are some practical steps to take before applying for car finance:

• Check your credit score: Review your credit report to ensure all the information is accurate. Look out for errors or outdated information that could be unfairly lowering your score, and take steps to correct them promptly.
• Pay off debts: Reduce any existing debts if it’s financially feasible. Lenders favour lower debt levels, as it indicates better financial management. However, only pay off debts if it won’t cause you financial strain.
• Avoid missed payments: Ensure there are no recent missed or late payments on your credit report. Missed payments can indicate unreliability to lenders, potentially affecting your application.
• Space out applications: If you've recently applied for credit, such as a personal loan or mortgage, wait a few months before applying for car finance. Spacing out applications avoids multiple hard credit checks, which can lower your score.
• Limit new credit: Avoid opening new credit accounts in the lead-up to your car finance application. Additional credit lines can increase your debt-to-income ratio, making you appear riskier to lenders.

If you've applied for car finance before and were declined, and you're unsure if your credit profile is the issue, you can check out our guide, “What to do if you’ve been refused car finance?”. This guide explains how to improve your credit score and explores alternative options that may be available to you.

Taking these steps not only increases your chances of approval but also sets you up for more favourable finance terms in the future.

Credit checks with AutoMoney Motor Finance 

At AutoMoney Motor Finance, we prioritise transparency and simplicity in the credit check process. When you make an initial application, we conduct a soft credit search. This allows us to assess your eligibility and provide provisional terms, including the finance amount and interest rate for which you’ve been pre-approved. Importantly, this soft search has no impact on your credit score and is not visible to other lenders.

Once your application is finalised, we perform a hard credit check. This check is recorded on your credit file and indicates to other creditors that you’ve submitted a full application for a finance agreement with us.

This straightforward approach ensures that you can explore your options confidently while maintaining control over your credit profile.

Apply for car finance 

If you are looking to apply for car finance, AutoMoney Motor Finance offer hire purchase (HP) car finance on a wide range of vehicles across the UK. Our team is here to help you every step of the way.

To get started, simply call our friendly team on the free phone number above or click through to complete your car finance application online. Explore your options today and let us help you find the right finance solution for your needs.

Representative example

You could borrow £10,000 over 60 months with an initial payment of £490.66 (including £199 Admin Fee) followed by 58 monthly payments of £291.66 with a final payment of £490.66 (including optional £199 Option to Purchase Fee).

Total amount repayable will be £17,897.60.

29.3% APR, annual interest rate (fixed) 24.7%.

This example uses the representative APR. This is the rate at least 51% of customers are expected to get.

Lending is subject to status and additional affordability checks. Rates quoted are subject to change and will depend on lending amount and personal circumstances.

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