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Does Refinancing Your Car Loan Hurt Your Credit Score?

Last updated 03/14/2024 by

Julie Bawden-Davis
Refinancing your car loan can be an ideal way to save money and even shorten the length of the loan. You may worry that refinancing your car will hurt your credit. Not necessarily. Read on for the lowdown on how refinancing car loans can affect your credit.

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Reasons to refinance your auto loan

There are several good reasons for refinancing car loans that can even help your credit score in the long run. A new loan with a better interest rate and terms can enable you to more quickly and easily pay off your car loan.
Consider applying for a new car loan if you want to:
  1. Lower your current interest rate by more than one percentage point.
  2. Lower monthly payments.
  3. Get more flexible loan terms. For instance, there are no payoff penalties with the new loan, but there was with the old loan.
  4. Save money over the life of the loan.
  5. Avoid an upside-down loan. If your current auto loan total amount owed is more money than your car is worth, the loan is upside-down.

What does refinancing a car loan entail?

Refinancing an existing car loan is a fairly simple process. You apply to a new lender. If your application is approved, you sign the required documents. Upon closing, the lender pays off your old car loan. The car’s title is then transferred to the new lender, and you begin making monthly payments to them.
The car loan application process requires that you provide:
a) Personal financial information, including employment status, monthly income, date of birth, social security number and permission to access your credit.
b) Loan specifics about your car, including the monthly payment amount, loan term and interest rate and remaining balance and number of payments.
c) Pertinent information about your car, including the year, make, model, vehicle identification number (VIN) and current mileage.

Plan ahead to minimize the effect of auto refinancing on your credit

When you apply for a new auto loan, the creditor will run your credit report to see if you qualify. This is considered a hard inquiry and is likely to lower your credit score by a few points.
If you plan ahead when refinancing your auto loan, you can minimize the effect of hard inquiries on your credit. According to myFico, most credit scores aren’t greatly affected if you do what is known as rate shopping. This involves submitting auto loan inquiries within a short period of time (within 45 days). If the inquiries are all done within this time period, they generally only count as one hard inquiry, rather than individual ones. This usually results in a minimal change to your credit score.

How long will your credit score be affected by a new auto loan?

Though a hard inquiry usually drops your credit score by a few points, the major effects of the inquiry generally only lasts two to three months. The negative impact of a hard inquiry on your credit score continues to decrease over time. Hard inquiries drop off of your credit report after 24 months.

Ways a new auto loan may affect your credit

When you refinance, the old auto loan will be closed. You’ll then get a new loan open date, which indicates a new credit obligation. There also won’t yet be a payment history. If you’ve been paying your old auto loan for a while and were timely on payments, this change can cause a drop in your credit score. This may not be a problem if the credit scoring model takes into consideration your closed loan payment history and averages out the age of your accounts.

Steps to take before applying for a new auto loan

To ensure that your credit report is minimally affected during auto refinancing, take the following steps:
  • Check your credit report
    Viewing your credit report before applying for auto loans allows you to check for any inaccuracies that might affect your ability to get a new loan. Checking your credit report also allows you to later determine how the process affected your score. Dispute any errors before applying for an auto loan.
  • Research auto loans
    Before applying, take the time to research auto loans. Check the reviews and read the fine print when comparing potential auto loans. Research the interest rate and terms of service you’ll most likely get if you’re approved.
  • Limit credit applications
    Help ensure that your search for a new auto loan is successful by limiting your credit efforts to auto loans now. If you attempt to apply for other types of credit while you’re filing auto loan applications, you’re likely to make it appear that you’re desperate for cash. This will cause creditors to turn you down for an auto loan.
  • Prepare for some credit changes
    Understand that when you get a new auto loan, your credit score is likely to lower temporarily. As you pay off your new auto loan on time, your score should rise.
Refinancing car loans requires some serious consideration. Visit SuperMoney’s auto loans reviews page to help you make the ideal decision for your financial situation.

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Julie Bawden-Davis

Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.

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