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5 minutes read. Published January 12, 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 late 2022. He values transparent reporting that allows readers to confidently get deals and make most appropriate choices regarding their finances. He is a specialist in auto and small business loans.









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Refinancing a car loan could get you better loan terms and free the funds from your budget. But what happens to the credit rating of yours? There's a chance that you'll see a slight reduction in your credit score. Don't stay clear of just because of a temporarily reduced score. The decision could turn out to be good choice that will result in cost savings or a much-needed financial relief. Refinancing an auto loan can affect credit refinancing the car loan could impact your credit profile. This is due to your FICO credit score. This is a given through the Fair Isaac Corporation. FICO scores are based on the way you manage your credit, such as your payments history, the amount of debt you owe and the duration of your credit history and even recent credit requests -- such as applications to refinance your vehicle loan. This credit scoring model may reduce your score by a couple of points when you make a new application for credit and a hard inquiry is made in your credit file. Additionally, having the addition of a new account to your credit profile reduces the average age of your credit cards, which also impacts your overall FICO score. This article will take a closer look at how refinancing a car loan can affect your credit score. It generates hard inquiries: Each time you make an application for a loan and you are approved, there is a hard credit inquiry produced, which may cause a slight decrease in your credit score. Hard inquiries are on your credit report for as long as two years, but will only affect your score for up to 12 months. Therefore, the process -- which involves applying for a new loan -- could temporarily ding the score of your credit. It lowers your accounts' average age: Refinancing also lowers your average age of accounts, which can lead to an eventual reduction in your credit score. It's good to know that the age of your account is only 15 percent on your score. Your score should bounce back quickly if you manage your finances properly the newly acquired auto loan and other accounts with debt. The impact is greater if it's reported as a new loan When a loan refinance is reported as an "new" loan, it is more likely to impact your credit profile. The refinance won't just result in a credit check, but will also have the effect of creating a new "open date" on your credit report. If a new open date is found, it tells the credit agencies you have taken on a new debt obligation, thereby increasing your total debt burden. How long will your credit score suffer through refinancing? While refinancing a vehicle loan can affect your credit score, these effects are not permanent. Within a few months of no payments your credit score will get back to where it was before you refinanced. In some instances it could even rise slightly. If you're facing any difficult concerns regarding your refinancing, the impact on your score due to these inquiries will diminish in a matter of one year. How to minimize the harm on your credit rating While your credit score might decrease when refinancing but there are ways to : Get prequalified. Find the best deal on refinancing. Once you have a shortlist of preferred lenders, get to look at financing options that won't affect the credit rating. Apply within a specified time. If you make loan applications within a 14-day period, the majority of credit scoring models will group them into a single inquiry. This is known as rate shopping. It also helps reduce the impact upon your credit rating. Pay on time for auto loan payment. The most important aspect of your score on credit is the repayment history. It accounts for 35 percent therefore, making sure you pay your loan on time each month will aid in bouncing your credit score back. Wait to open additional credit accounts. Your credit age will decrease as you refinance. Refraining from creating new credit cards in the wake of refinancing will increase this number and may raise your credit score over time. Refinancing a car loan works When you are in the process of refinancing your auto loan, follow these steps to make the process more seamless: Check your credit. Review the credit reports to be sure it's free of errors, and file disputes to address any issues you discover. This step can be helpful . A higher score of 670 or higher improves your odds of securing an additional loan with attractive rates. Find the most attractive loan deals. There is no shortage of loans, which is why you need to shop around for the most competitive rate. Review lender reviews and apply to look at loan offers you may qualify for. Make an application in writing. The majority of banks, credit unions and online lenders feature easy online applications. You can also go to an office or phone to make an application. You may receive a lending decision right away, however, the lender may take a bit to finalize your closing papers. Close the deal. Review the loan documents and address any issues or questions you have regarding the lender. After you sign the loan documents, you will be able to sign the loan with your current lender will send you a an amount to cover the current loan or take care of the transaction. When to refinance your car loan There are many reasons why refinancing your auto loan may be beneficial. But, you must only take the next step . Consider refinancing when auto loan rates have slowed since you have taken out the car loan or you've seen your credit rating improve, and you can now qualify for a better rate. A refinancing option is also an option when you're in a rough financial patch and are in need of lower car payments to free up cash. Even if you pay the same interest rate, you may be able to extend your loan duration, which will lower your monthly payment. It is possible to look into a more than refinancing, which involves adjusting the monthly payment amount as well as the due date and interest rate for your existing loan. Refinancing is also an option in the event that you want to add or to the loan. When is it a bad idea to refinance an auto loan? However, there are a handful of scenarios where refinancing is not a good option. Vehicles that are old or with high mileage: If you're driving an older vehicle or that has an excessive mileage, it might be wise not to refinance. It's not worth the cost of refinancing if you will have to replace your vehicle soon. Refinancing fees outweigh the benefit: If you've already completed the majority of the initial loan amount, the costs related to refinancing could be more costly than the benefits. Looking to apply for credit in the near future If you're applying for more credit or loans in the near future, you might want to reconsider refinancing. Refinancing your vehicle loan will generate a hard credit inquiry and lower the average age of your accounts, which can temporarily affect your credit score. Can't get a good rate: If the rates that you're given don't match the current rate of interest, there's little reason to refinance. The main point is that you are paying for your car loan. It can temporarily hurt your credit score. However, the financial benefits could far outweigh the loss in credit score. There are ways to minimize the negative impact of your score and assist it rebound when you are applying for refinancing. Before deciding if refinancing makes sense, you should be familiar with the process to avoid any unexpected surprises. Consider contacting potential lenders, obtain pre-qualification, and calculate the figures 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 late 2022. He values transparent reporting that allows readers to successfully land deals and make the most informed decisions regarding their finances. He specializes in auto and small business loans.











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