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Will Refinancing my Auto Loan Hurt my Credit?

Karen Stevens

Dec 19, 2022 8 min read

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Refinancing a car loan can help you secure a lower interest rate and reduce your monthly payments – or both! But how does refinancing affect your credit score?

The answer depends on how much of an impact the original loan had on your credit score in the first place. If it was relatively minor, the effect of refinancing might also be minimal. On the other hand, if the loan was one of your larger credit obligations and you already had a significant amount of debt, then refinancing it could substantially impact your credit score.

Read on to learn how refinancing your car loan might impact your credit, what to consider before refinancing, and a step-by-step guide to the process.

How Does Refinancing a Car Loan Affect Your Credit Score?

Refinancing could negatively or positively impact your credit score, depending on your financial situation.

A Hard Credit Inquiry Could Decrease your Score

When you initially take out a car loan, the lender will likely make a hard inquiry into your credit history. A hard inquiry is when a lender pulls your credit report to evaluate you for a loan or other form of credit. This could cause a slight drop in your credit score, but it should recover after a few months.

If you refinance the loan, the lender will likely make another hard inquiry into your credit history, which could further lower your score. If you’re shopping around for lenders, you may want to try and get them all to make their inquiries around the same time. That way, the credit bureaus might count the various checks as one single hard credit pull.

A Longer Loan Term Could be Better for Your Credit Score

If you initially had a longer loan term with more payments, refinancing to a shorter term with fewer payments might not have the desired effect on your credit score. That’s because the longer you make on-time payments, the more trustworthy you are in the eyes of creditors. While paying off your loan quickly may demonstrate that you are financially responsible, it may not necessarily improve your credit score very much.

When You Refinance, It Is Considered a New Loan on Your Credit Report

When you refinance a car loan, it is usually considered a new loan. The new loan's terms will differ from your original loan in terms of interest rate, term length and other key components.

Applying for and obtaining a new loan may temporarily lower your credit score due to the additional inquiry on your credit report. However, making timely payments and keeping your debt-to-income ratio low will help improve your credit score.

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How Long Does a Refinance Hurt Your Credit Score?

As mentioned above, refinancing a loan could result in a slight decrease in your credit score. The drop in your credit score should be relatively minor and is likely to recover after a few months. However, if you already have significant debt or the loan you are refinancing is one of your largest obligations, it could have a larger impact. Therefore, it's important to consider the pros and cons of refinancing before committing.

Is Refinancing a Car Worth It?

It might be! But it depends on your unique situation. Look at the terms of your existing loan compared to potential refinancing options. Here are some things to consider before moving forward:

Will I Reduce My Monthly Payments?

Refinancing a car loan can reduce your monthly payments if you secure a lower interest rate or an extended repayment period. However, this depends on the existing loan's terms and the new refinancing options.

Will I Get a Better Interest Rate?

Generally, when you refinance a car loan, you can qualify for a better interest rate because the lender views it as less of a risk. Interest rates fluctuate over time, so if you wait until the market changes in your favour, you may get an even better rate on your refinanced loan.

Additionally, if you have improved your credit score since taking the original loan, that could also help you qualify for a lower interest rate.

Will Refinancing Improve my Financial Situation?

Refinancing a car loan can help your finances in many ways. It may help you reduce your monthly payments or help you save money over time with lower interest rates. Additionally, if you can pay off the loan sooner than anticipated, this could help free up additional cash flow for other expenses or investments.

Are There any Risks to Refinancing?

Yes, there are certain risks associated with refinancing a car loan. Some potential risks include penalties for early payment, increased interest rates if the loan terms are extended, and additional fees from the lender. More expensive monthly payments or payments you have difficulty making could harm your credit score if you miss them.

Think about how long you plan on keeping the vehicle. When you crunch the numbers, you may discover that it's better to just continue with your existing loan if you’re not planning on keeping the vehicle for the long term.

How Can I Ensure I am Getting a Good Deal?

As previously mentioned, you need to shop around. Compare the offerings from different lenders and investigate any potential fees or penalties. Additionally, ensure that the interest rate you get with the refinanced loan is lower than your current rates.

Compare any long-term savings you could make with the refinanced loan versus your current loan. Ultimately, ensure that the potential benefits outweigh any possible risks before deciding.

auto loans

How Long Should I Wait to Refinance My Car?

The best time to refinance a car loan is when you have built up your credit and can qualify for better terms. It's recommended to wait at least six months before considering refinancing, but it could be beneficial to wait even longer.

The current interest rates also impact whether or not it is worth it to refinance. If you bought your car at a time when rates were low, it might not make sense to refinance if rates go higher. However, if rates were high when you bought, consider refinancing to access lower rates when they become available.

How to Limit the Impact on Your Credit Score When Refinancing an Auto Loan

When considering refinancing an auto loan, it is essential to consider how it may affect your credit score.

Get Prequalified

Instead of asking lenders to make a hard credit check right away, consider getting pre-qualified. That way, you can explore your options and move forward with one when you’re ready.

Make Sure Your Loan is in Good Standing

Before you refinance, make sure you haven’t missed any payments and that everything is correct with the credit bureaus. Tie up loose ends and correct any mistakes on your credit score, so you’re in the best shape possible when refinancing.

Make Sure the New Payments Work with Your Budget

If you refinance for a shorter loan term with higher monthly payments, make sure that it doesn’t put too much of a strain on your budget. Assess the impact of refinancing on your long-term savings and ensure you won’t default on your payments if something unexpected arises.

monthly payment

Is It Better to Refinance a Car or Pay it Off Early?

Whether or not it’s better to refinance a car or pay it off early depends on your current financial situation. Refinancing an auto loan can benefit some people by providing access to lower interest rates, which may help reduce monthly payments and save money in the long run.

However, paying off your car loan early is a great way to save money and reduce overall debt. Paying the loan off early will help avoid additional interest payments and improve your credit score as you demonstrate an ability to pay debts on time.

Ultimately, when deciding whether or not it’s better to refinance a car or pay it off early, it is important to consider your current financial situation and determine which option will be most beneficial for you.

Can I Refinance My Auto Loan with Bad Credit?

Yes, it is possible to refinance a car loan with bad credit. However, the loan's interest rate and other terms may not be as favourable as if you had good credit. And some lenders may require higher down payments to approve your application. So, unless there’s a compelling reason to refinance, consider keeping your existing loan until your credit improves.

credit inquiries

What is the Best Way to Refinance My Car?

Here’s a step-by-step guide to refinancing your car loan to gain access to better terms and lower interest rates.

Step 1: Decide if refinancing is right for you – Before you start the process, you should make sure that refinancing will be beneficial. Review the details of your current loan and ensure that any refinancing plan financially benefits you in the long run.

Step 2: Research different lenders – Once you’ve decided that refinancing is right for you, it’s time to start researching lenders. Compare their rates, fees, and repayment options to determine which lender offers the best value.

Step 3: Gather your documents and information – Before you can apply for a new loan, you’ll need to collect all of your necessary documents, such as proof of income, bank statements, and more. Make sure you have everything you need to refinance your car loan successfully.

Step 4: Apply for the loan – With your documents in hand, fill out the application and wait for the lender to decide. If approved, you’ll be ready to move forward with refinancing your car loan.

Step 5: Sign the agreement and start making payments – Once you’ve been approved, it’s time to sign the paperwork and begin making payments on your new loan.

loan payments

What’s a Good Credit Score to Refinance a Car?

When it comes to credit scores, the higher, the better, no universal number gets you access to the best rates; different lenders allow you access to different rates based on their own criteria.

Generally speaking, a good credit score is between 713 and 900. If you’re in that range, you are more likely to have access to the best rates the lender offers, and you’re in a better position to negotiate for a better deal.

The Bottom Line

Refinancing your car loan can provide financial benefits, including lower interest rates and more flexible repayment options. It can also help reduce your monthly payments and save money in the long run.

Considering all these factors can help you make an informed decision when deciding whether to refinance a car loan. Ultimately, whether to refinance your car loan is up to you and should be based on your unique financial situation.

Karen Stevens
Karen Stevens
 | 
Personal Finance Writer

Karen Stevens is a personal finance and business writer with experience across industries from travel to tech. She believes personal finance should be accessible to everyone, and is always on the hunt for that next money-saving hack.

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