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5 minutes read. Published on January 12, 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 clear reporting that helps readers successfully find deals and make the best decisions for their financials. He specializes in auto and small business loans.









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Refinancing an auto loan can help you get more favorable loan conditions and help you free the funds from your budget. What happens to your credit score? It's likely that you'll notice a decrease of your credit rating. But don't steer clear of the possibility of having a lowered score. This could prove to be a good decision that results in costs savings or financial relief. Refinancing an auto loan impacts credit Refinancing the car loan could affect your credit profile. This is because of you FICO credit score, which is a given through the Fair Isaac Corporation. FICO scores are determined by the way the credit you have managed, such as your payments history, the amount of you owe in debt, the duration of your credit history, and even recent credit applications -- such as applications to refinance your vehicle loan. The credit scoring model could lower your score a few points if you make a new application for credit and an inquiry is placed in your credit file. In addition, the addition of a new account to your credit profile reduces the age average of credit cards, and this can impact your overall FICO score. Here is a deeper look at how refinancing a car loan affects your credit score: It can trigger hard inquiries. Every time you make an application for an loan there is an inquiry on your credit report is generated, which could result in the slightest decrease in your credit score. Hard inquiries remain visible on your credit reports for up to two years, but will only affect your score for up to 12 months. Consequently, -- which involves applying for a new loan can temporarily impact the score of your credit. It reduces your accounts' average age: Refinancing also decreases the average age of accounts, leading to the possibility of a decrease in your credit score. It's good to know that the age of your accounts only affects 15% on your score. Your score will improve quickly if you responsibly manage your newly acquired auto loan and other accounts with debt. It has more impact if the loan is reported as a new loan: If your loan refinance is considered an "new" loan, it can have a greater impact on your credit profile. Refinancing will not just generate a credit inquiry but will also have the effect of creating the new "open date" in your profile. If a new open date appears, it informs the credit agencies that you have agreed to a new obligation, increasing the total amount of debt. How long will your credit score suffer through refinancing? While refinancing a vehicle loan impacts your credit score, the effects are not permanent. After a couple of months of payments that aren't interrupted your credit score will be back to the level it was prior to the time you refinanced. In some cases it could even rise by a small amount. If you've got any tough questions regarding refinancing, the score impact due to these inquiries will diminish entirely within one year. How to minimize the harm on your credit rating While your credit score might decline when you refinance, there are ways 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 impacting your credit score. Apply within a certain window. If you submit loan applications within a 14-day time frame, many credit scoring models combine them into a single inquiry. This is referred to as rate shopping. It also helps minimize the effect of your score. Pay on time for auto loan payments. The most significant component of the credit rating is repayment history. It is responsible for 35 percent of your credit score therefore, making sure you pay your loan in time every month can boost your credit score back. Do not wait to open new credit accounts. Your credit age will decrease when you refinance. Holding off on opening new credit accounts after refinancing will help improve this number and possibly improve your credit score over time. What is the process for refinancing a vehicle loan is done When you are looking to refinance your car loan take these guidelines to help make refinancing more effortless: Review your credit. Examine your credit report to be sure that it's not contaminated by errors, and file disputes to address any issues you find. This step can be helpful . A better score -- 670 or more -- improves your odds of securing the next loan with attractive conditions. Find the top loan deals. There is no shortage of , so you must shop for the most competitive rate. Check out lender reviews and apply to look at loan offers you may qualify for. Make an official application. Most banks, credit unions and online lenders feature easy online applications. You can also go to the branch or phone to submit an application. It is possible to receive a loan decision immediately, but the lender may take some time to sign all the paperwork for closing. Close the deal. Go over the loan documents and resolve any questions or concerns regarding the lender. After you sign, the new lender will issue you with an amount to cover your current loan or manage the transaction itself. Refinancing your car loan There are a variety of reasons that refinancing your automobile loan might be a good idea. But, you must only take the next step . It is worth looking into refinancing if auto loan rates have decreased since you took out the car loan or you've seen your credit rating improve, and you can now qualify for a better rate. It is also a good option for those who are going through an economic crisis and require lower monthly auto payments to free up funds. Even if you receive the same interest rate, you may be able to extend the loan duration, which will lower your monthly payments. It's possible to consider a better option than refinancing, which entails changing the monthly amount and due date, or the interest rate on your existing loan. Refinancing is also an option if you need to add or modify the loan. Is it a good idea to refinance an auto loan? However, there are several scenarios where refinancing is not a great decision. Vehicles that are old or with high mileage: If you're driving an older car or one with an excessive mileage, it might be best not to refinance it. It's not worth paying the cost of refinancing when you'll have to replace your car in the near future. Refinancing costs are more expensive than the benefits: If you've already completed the majority of the initial loan sum, then the fees associated with refinancing may exceed the benefits. Applying for more credit soon If you're planning to apply for more credit or loans soon, you may consider rethinking refinancing. Refinancing your car loan could trigger a hard inquiry into your credit and decrease the average age of your accounts which can temporarily affect your credit score. If you aren't able to get a great rate: If the rates that you're offered don't beat the current rate of interest it's not a good idea to refinance. The main point is that you are paying for your car loan. It could temporarily affect the credit rating of yours. However, the financial advantages could far outweigh the loss in credit rating. There are also methods to limit the negative impact of your score and assist it rebound in the event of a refinancing application. Before you decide if refinancing is a good idea, sense, you should be familiar with the process to avoid any surprises. Additionally, research potential lenders, obtain pre-qualification, and run the numbers to make an 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.



Editor: Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate since late 2022. He is a fan of transparent reporting that allows readers to easily find deals and make the best choices for their money. He is a specialist in auto and small business loans.











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