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5 minutes read. Published January 12, 2023

Authored by Mia Taylor Written by Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.

Editor: Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate from late 2022. He values the clarity of his reporting, which helps readers confidently land deals and make the best decisions for their financials. He specializes in auto and small business loans.

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Refinancing the car loan could result in better loan terms and free up funds in your budget. But how will it affect the credit rating of yours? You’ll likely see a small drop of your credit rating. But don’t steer clear of simply because of a temporarily lower score. It could be a good choice that leads to cost savings or a much-needed financial relief. Refinancing a car loan affects credit Refinance the car loan could affect your credit score. This is because of your FICO credit score. It is given through the Fair Isaac Corporation. FICO scores are based on the way they manage credit which includes your payment history, how much debt you owe, the length the history of your credit and even any recent credit applications for example, applications to refinance your auto loan. This credit scoring model may lower your score a few points if you apply for credit, and a request for hard inquiry is made in your credit file. In addition, a new account on your credit profile decreases the average age of your credit accounts, and this can impact your FICO score overall. This article will take a closer analysis of how refinancing a car loan impacts your credit: It can trigger hard inquiries. When you make an application for a loan, an inquiry on your credit report is produced, which may result in the slightest drop of your FICO score. Hard inquiries stay in your credit file for up to two years but only impact your score for up to 12 months. Therefore, the process — which involves applying for the same loan could for a short period of time affect the credit rating. It reduces your accounts’ average age. Refinancing also reduces the average age of your accounts, which can lead to the possibility of a lower credit score. The good thing is that the age of your accounts only affects 15 percent of your credit score. Your score should improve quickly if you responsibly manage the newly acquired auto loan and other debt accounts. This is more significant if you report it as a brand new loan When a loan refinance is reported as a “new” loan, it is more likely to impact your credit score. The refinance won’t just result in a credit check, but also carry the effect of creating a new “open date” on your profile. When a new open day appears, it informs the credit agencies that you have accepted a new loan obligation, which will increase your overall debt load. How long will your credit score suffer by refinancing? Even though refinancing a car loan affects your credit score, these effects are temporary. After a couple of months of uninterrupted payments, your credit score should be back to the level it was before you refinanced. In some instances, it may even increase slightly. If you have any hard questions regarding refinancing, the impact on your score from these will fall off in a matter of an entire year. How can you limit the damage to your credit score Although your credit score might decline when you refinance however, there are several ways to increase your credit score: Apply for prequalification. Shop around to find the best rate on refinancing. Once you have a shortlist of your preferred lenders, you can to view potential financing offers without impacting your credit score. Apply within a certain window. If you submit loan applications within the 14-day timeframe, most credit scoring models combine the applications into one inquiry. This is called rate shopping. It also helps lessen the effect of your score. Make timely auto loan payment. The biggest factor in the credit rating is credit history. It’s responsible for about 35 percent therefore, making sure you pay your loan on time each month can aid in bouncing your credit score back. Wait to open additional credit accounts. The age of your credit will decrease after refinancing. Refraining from the opening of new accounts for credit following refinancing will help increase this number and may increase your credit score in the future. What is the process for refinancing a vehicle loan is done When you are ready to refinance your auto loan Follow these guidelines to help make refinancing more seamless: Check your credit report. Check your credit report to make sure that it’s not contaminated by errors, and file disputes to address any issues you discover. Doing this can aid . A better score of 670 or more — improves your odds of securing the next loan with attractive terms. Find the best loan offers. There’s no shortage of , so you need to shop around for the best deal. Review lender reviews and be prequalified to look at loan deals you might be eligible for. Make an application in writing. Many credit unions, banks and online lenders have simple online applications. You can also go to an office or phone to apply. You could receive a loan decision immediately, but the lender may take a bit to finalize the closing documents. Seal the deal. Go over your loan documents and address any concerns or questions with the lender. When you’ve signed the loan documents the loan documents, your new lender will provide you with an amount to cover the current loan or manage the transaction. If you want to refinance your vehicle loan There are several reasons that refinancing your automobile loan might be a good idea. However, you should only proceed . Refinancing is worth considering when you find that your auto loan rates have dropped since you took out the auto loan and your score is improving, and you can now qualify for a better rate. Refinancing is also sensible if you’re going through a rough financial patch and require lower monthly vehicle payments to save cash. Even if you pay the same interest rate, you may be able to extend the loan duration, which will lower your monthly payments. It is possible to look into a more than refinancing, which involves altering the monthly payment, due date or interest rate for your existing loan. You should also refinance in the event that you want to add or to the loan. When is it a bad idea to refinance the car loan? However, there are some scenarios in which refinancing is not a great decision. Vehicles that are old or with high mileage If you own an older vehicle or that has a an excessive mileage, it might be best not to refinance it. It’s not worth the cost of refinancing when you’ll have to replace your vehicle in the near future. Refinancing costs are more expensive than the benefits If you’ve already completed the majority of the initial loan amount, the fees that come with refinancing might be more costly than the benefits. Applying for more credit soon If you’re planning to apply for credit or loans within the next few months, you may be thinking about refinancing. Refinancing your car loan could trigger a hard inquiry into your credit and decrease the average time to repay your loans, which can temporarily affect your score on credit. You can’t find a favorable rate If the rates you’re given don’t match the current rate of interest, there’s little reason to refinance. The bottom line There are the consequences of a car loan. It can temporarily hurt you credit scores. However, the financial advantages may significantly outweigh a drop in credit score. There are also ways to reduce the negative impact on your credit score and help it to rebound when you are applying for refinancing. Before you decide if refinancing is a good idea, sense, be aware of the process to avoid any unpleasant surprises. Additionally, research the lenders, apply for prequalification and then run the numbers for a more informed decision.

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Written by a Contributing Writer

Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation’s leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.

Edited by Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate since the end of 2022. He is a fan of transparent reporting that allows readers to confidently land deals and make the most appropriate choices regarding their finances. He is a specialist in small and auto loans.

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