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5 min read Read Published 12 January 2023
Written 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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He believes in clear reporting that helps readers easily find deals and make the most appropriate choices regarding their finances. He is a specialist in auto and small business loans.
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Refinancing an auto loan can help you get better loan terms and also free up funds in your budget. But how will it affect the credit rating of yours? It's likely that you'll notice a decrease in your credit score. However, don't be afraid to stay away from the possibility of having a lowered score. This could prove to be a good decision that results in cost savings or a much-needed financial relief. What happens when you refinance a car loan impacts credit Refinancing a car loan can impact your credit score. This is because of your FICO credit score, which is provided by the Fair Isaac Corporation. FICO scores are calculated based on how they manage credit including your payments history, the amount of debt you have to pay, the length of your credit history and even recent credit applications -- for example, applications to refinance your vehicle loan. The credit scoring model could reduce your score by a couple of points when you apply for credit and an inquiry is logged to your credit record. Also, a new account on your credit report decreases how old your credit accounts and this can impact your overall FICO score. Here's a more detailed look at how refinancing a car loan can affect your credit score. It generates hard inquiries: Each time you apply for a loan and you are approved, an inquiry on your credit report is produced, which may cause the slightest decrease in your credit score. Hard inquiries stay in your credit file for up to two years, but will only affect your score for up to 12 months. Consequently, -- which is the process of applying for a new loan could for a short period of time affect the score of your credit. It reduces your accounts' average age. Refinancing also reduces the average age of your accounts, which can lead to the possibility of a decrease in your credit score. It's good to know that account age only counts for 15 percent of the credit score. Your score should bounce back quickly if you are able to responsibly manage the car loan and other debt accounts. It has more impact if you report it as a brand new loan When a loan refinance is classified as a "new" loan, it can have a greater impact on your credit score. The refinance will not only result in a credit check, but also carry the consequence of generating a new "open date" in your profile. When a new open date appears, it informs the credit bureaus that you've agreed to a new obligation, which will increase the total amount of debt. What is the length of time the credit rating of my client be affected by refinancing? Although refinancing a car loan can affect your credit score, the effects are temporary. Within a few months of payments that aren't interrupted, your credit score should get back to where it was before you refinanced. In some instances the score may rise little. If you're facing any difficult questions regarding refinancing, the score impact from these will fall off entirely within a year. How to minimize the harm to your credit score Even though your credit score could drop when you refinance however, there are several methods to get prequalified. Look around for the best rate on refinancing. Once you have a shortlist of preferred lenders, get to look at financing options without affecting the credit rating. You must apply within a specific timeframe. If you submit loan applications within the 14-day period, the majority of credit scoring models will group them into a single inquiry. This is referred to as rate shopping and can also minimize the impact on your credit score. Pay on time for auto loan payment. The biggest factor in your score on credit is the credit history. It accounts for 35 percent, so paying your loan punctually each month will help your credit score bounce back. Be patient when opening new credit accounts. The age of your credit will decrease after refinancing. The delay in creating new credit cards after refinancing will help to improve this score and could increase your credit score in the future. How refinancing a car loan works If you're ready to refinance your auto loan Follow these instructions to ensure that the procedure is seamless: Check your credit report. Review your credit score to be sure that it's not contaminated by errors, and then file a dispute to fix any issues you find. Doing this can aid . A better score of 670 or higher increases your chances of getting a new loan with attractive terms. Find the top loan offers. There is no shortage of , so you should shop around to find the best deal. Check out lender reviews and be prequalified to look at loan offers that you could be eligible for. Make a formal application. Many credit unions, banks and online lenders feature easy online applications. You can also go to the branch or phone to apply. It is possible to receive a loan decision immediately, but the financial institution may take some time to sign all the paperwork for closing. Seal the deal. Check all the loan documents and resolve any questions or concerns to the lender. When you've signed the loan documents an agreement, you will be able to sign the loan with your current lender will send you a an amount to cover your current loan or take care of the transaction on its own. Refinancing your car loan There are several reasons why refinancing your auto loan could make sense. But, you must only move forward . Consider refinancing in the event that you find that your auto loan rates have dropped since you have taken out your auto loan or your credit score has improved and you're now eligible to receive a better rate. It is also a good option if you're going through a rough financial patch and require lower monthly vehicle payments to save funds. Even if you receive the same interest rate, you may be able to extend the loan term, which lowers your monthly payment. You could seek a rather than refinancing. This involves changing the monthly amount, due date or interest rate on your existing loan. You should also refinance if you need to increase or add to the loan. Is it a good idea to refinance a car loan? There are some scenarios in which refinancing is not a good idea. Vehicles that are old or with high mileage If you own an older vehicle or one that has a an excessive mileage, it might be wise not to refinance. It's not worth the costs associated with refinancing if you'll need to replace your car in the near future. The cost of refinancing is greater than the benefits If you've completed the majority of the initial loan amount, the costs associated with refinancing may be more costly than the benefits. Are you planning to apply for credit soon: If you are applying for more credit or loans in the near future, you might want to reconsider refinancing. Refinancing your car loan will generate a hard credit inquiry , and reduce the average age of your accounts, which can temporarily affect your score on credit. If you aren't able to get a great rate: If the rates you are offered don't beat the rate you currently pay There's no reason to refinance. The main point is that you are paying for your car loan. It may temporarily harm you credit scores. However, the financial benefits could far outweigh the loss in credit rating. There are also methods to limit the negative impact of your score and help it rebound in the event of a refinancing application. Before deciding if refinancing makes sense, be aware of the process so that you don't face any surprises. Additionally, research lenders, get prequalified and then run the numbers to make an informed decision.
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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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since late 2022. He believes in the clarity of his reporting, which helps readers confidently land deals and make the most appropriate choices regarding their money. He specializes in auto and small business loans.
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