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Do refinancing your car loan hurt your credit? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial choices by offering interactive tools and financial calculators, publishing original and objective content, by enabling users to conduct research and compare information at no cost and help you make sound financial decisions. Bankrate has partnerships with issuers, including but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are displayed on this site are from companies that pay us. This compensation may impact how and when products are featured on the site, such as the order in which they appear within the listing categories, except where prohibited by law. Our loans, mortgages,, or other products for home loans. But this compensation does not influence the information we provide, or the reviews appear on this website. We do not contain the entire universe of businesses or financial deals that could be open to you.
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5 minutes read. Published 12 January 2023
Writen 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 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 small and auto loans.
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Refinancing a car loan could result in better loan terms and also free up funds in your budget. What happens to your credit score? You'll likely see a small reduction on your score. However, don't be afraid to stay away from the possibility of having a lowered score. This could prove to be a wise choice that leads to cost savings or much-needed financial relief. What happens when you refinance a car loan can affect credit refinancing a car loan could impact your credit profile. This is because of the FICO credit score. This is a given by the Fair Isaac Corporation. FICO scores are determined by how you manage your credit, such as your payments history, the amount of debt you have to pay and the time period of your credit history, and even recent credit applications -- such as applications to refinance your auto loan. The credit scoring model could reduce your score by a couple of points when you apply for new credit, and a request for hard inquiry is logged on your credit report. In addition, a new account on your credit report decreases the average age of your credit accounts and this can impact your overall FICO score. This article will take a closer look at how refinancing a car loan can affect your credit score. It can trigger hard inquiries. Every time you make an application for a loan there is an inquiry on your credit report is generated, which could result in an occasional decrease in your credit score. Hard inquiries remain on your credit report for up to two years, but will only affect your score for a period of 12 months. This means that -- if it is the process of applying for the same loan -- could temporarily ding the score of your credit. It reduces your accounts' average age. Also, refinancing lowers your average age of accounts, resulting in an eventual lower credit score. The good thing is that the age of your account is only 15% of the credit score. Your score will improve quickly if you responsibly manage your car loan and other debt accounts. This is more significant if the loan is reported as a new loan When a loan refinance is considered a "new" loan, it can have a greater impact on your credit score. The refinance will not only trigger a credit inquiry, but will also have the consequence of generating a new "open date" in your profile. If a new open date is found, it tells the credit agencies that you have accepted a new loan obligation, thereby increasing your total debt burden. How long will the credit rating of my client be affected through refinancing? While refinancing a vehicle loan affects your score on credit, these impacts are not permanent. Within a few months of uninterrupted payments, your credit score should get back to where it was prior to the time you refinanced. In certain cases, it may even increase slightly. If you've got any tough inquiries related to your refinancing, the score impact due to these inquiries will diminish completely within the course of an entire year. How can you limit the damage for your score Although your credit score may decrease when refinancing, there are ways to : Get prequalified. Find the best deal on refinancing. When you've got a list of lenders you prefer, sign up to view potential financing offers that won't affect the credit rating. You must apply within a specific timeframe. If you make loan applications within the 14-day time frame, many credit scoring models will group the applications into one inquiry. This is called rate shopping. It also helps lessen the effect upon your credit rating. Pay on time for auto loan payment. The biggest factor in your score on credit is the repayment history. It's responsible for about 35 percent, so paying your loan on time each month will boost your credit score back. Be patient when opening new credit accounts. The age of your credit will decrease when you refinance. Refraining from creating new credit cards 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 works If you're looking to refinance your car loan Follow these guidelines to help make refinancing seamless: Check your credit report. Review your credit score to ensure it's clean of errors and file disputes to address any issues that you spot. Taking this step can help . A greater score -- 670 or more -- improves your odds of securing an additional loan with attractive terms. Find the most attractive loan offers. There is plenty of them , so you need to shop around for the best deal. Review lender reviews and get prequalified to look at loan offers you may qualify for. Make an application in writing. The majority of banks, credit unions and online lenders have simple online applications. You can also go to the branch or phone to make an application. It is possible to receive a loan decision in a matter of minutes, however the lender may take a bit to finalize your closing papers. Seal the deal. Check all the loan documents and discuss any issues or questions you have to the lender. After you sign an agreement, you will be able to sign the loan with your current lender will issue you with the funds to pay off the current loan or manage the transaction itself. If you want to refinance your vehicle loan There are many reasons to refinance your car loan may be beneficial. But, it is important to proceed . Consider refinancing if auto loan rates have slowed since you have taken out the car loan and your score is improving and you can now qualify for a lower rate. A refinancing option is also an option for those who are going through a rough financial patch and need lower vehicle payments to save cash. Even if you receive the same interest rate, you may be able to extend your loan period, which reduces your monthly payments. You could seek a rather than refinancing. This involves changing the monthly amount, due date or interest rate of your current loan. Refinancing is also an option when you have to increase or add to the loan. Is it a good idea to refinance an auto loan? However, there are a handful of scenarios where refinancing is not a good idea. Old vehicle or high mileage: If you're driving an older vehicle or with an excessive mileage, it might be wise not to refinance. It's not worth incurring the fees associated with refinancing when you'll have to replace your vehicle soon. Refinancing costs are more expensive than the benefits If you've paid off most of the initial loan amount, the cost associated with refinancing may outweigh the benefit. Are you planning to apply for credit soon If you're applying for more credit or loans in the near future, you might consider rethinking refinancing. Refinancing your vehicle loan can trigger a inquiry into your credit and decrease the average time to repay your loans, which will temporarily lower the credit rating of your. Can't get a good rate If the rates you're being offered aren't competitive with your current interest rate it's not a good idea to refinance. The main point is that you are paying for your car loan. It could temporarily affect you credit scores. However, the financial advantages may significantly outweigh a drop in credit rating. There are also ways to minimize the negative impact on your credit score and assist it rebound when you are applying for refinancing. Before deciding whether refinancing makes sense, be aware of the process to avoid any unexpected surprises. Also, explore lenders, get prequalified and run the numbers to make an informed choice.
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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.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate from late 2022. He values clear reporting that helps readers successfully find deals and make the best choices for their finances. He specializes in small business and auto loans.
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