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5 min read Read Published January 12, 2023

Authored 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

Edited by Helen Wilbers Edited by

Helen Wilbers has been editing for Bankrate from late 2022. He believes in the clarity of his reporting, which helps readers easily land deals and make the best choices for their finances. He is a specialist in small business and auto loans.

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Refinancing the car loan could result in more favorable loan terms and free money in your budget. But what happens to the credit rating of yours? It’s likely that you’ll notice a reduction of your credit rating. However, don’t be afraid to stay away from the possibility of having a lowered score. This could prove to be a sound choice that leads to cost savings or a much-needed financial relief. Refinancing an auto loan impacts credit Refinancing a car loan could affect your credit profile. This is because of your FICO credit score. It is a offered through the Fair Isaac Corporation. FICO scores are determined by how the credit you have managed, including your payment history, how much debt you have to pay, the time period of your credit history, as well as any recent credit applications — 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 an inquiry is logged on your credit report. In addition, the addition of a new account to your credit report decreases how old your credit accounts which also impacts your overall FICO score. Here’s a more detailed analysis of how refinancing a car loan impacts your credit: It generates hard inquiries: Each time you make an application for a loan there is a hard credit inquiry is produced, which may result in an occasional drop in your credit score. Hard inquiries are visible on your credit reports for up to two years, but they only affect your score for a period of 12 months. Therefore, the process — which involves applying for the same loan could for a short period of time impact your credit score. The loan will lower your account’s average age. Also, refinancing lowers your average age of accounts, leading to the possibility of a lower credit score. It’s good to know that account age only counts for 15 percent of the credit 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 classified as an “new” loan, it is more likely to impact your credit profile. The refinance will not only generate a credit inquiry but will also have the consequence of generating an additional “open date” in your profile. When a new open date shows up, it tells the credit agencies you have accepted a new loan obligation, increasing your overall debt load. What is the length of time my credit score be affected through refinancing? While refinancing a vehicle loan impacts the credit rating of your client, these impacts are temporary. After a couple of months of uninterrupted payments your credit score should get back to where it was before you refinanced. In some cases it could even rise by a small amount. If you have any hard concerns regarding your refinancing, the score impact due to these inquiries will diminish in a matter of a year. How can you limit the damage for your score 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 lenders you prefer, sign up to view potential financing offers that won’t affect the credit rating. Apply within a certain window. If you make loan applications within the 14-day timeframe, most credit scoring models combine all of them into one single inquiry. This is known as rate shopping. It also helps lessen the effect of your score. You must make timely auto loan payments. The most significant component of your score on credit is the credit history. It’s responsible for about 35 percent, so paying your loan on time each month will aid in bouncing your credit score back. Do not wait to open new credit accounts. Your credit age will decrease after refinancing. Holding off on the opening of new accounts for credit in the wake of refinancing will improve this number and possibly increase your credit score over time. How refinancing a car loan works If you’re looking to refinance your car loan Follow these instructions to ensure that the procedure is more seamless: Check your credit report. Check your credit report to make sure it’s clean of errors and file disputes to address any issues you find. Doing this can aid . A greater score of 670 or more — can increase your chances of securing the next loan with attractive conditions. Find the top loan deals. There’s no shortage of , so you must shop for the best price. Review lender reviews and apply to view loan offers that you could be eligible for. Submit an application in writing. Many credit unions, banks and online lenders offer simple online applications. You can also visit an office or phone to submit an application. You may receive a lending decision in a matter of minutes, however the bank may need some time to sign all the paperwork for closing. Seal the deal. Check the loan documents and discuss any concerns or questions to the lender. When you’ve signed the loan documents an agreement, you will be able to sign the loan with your current lender will send you a the funds to pay off your current loan or take care of the transaction on its own. Refinancing your car loan There are many reasons why refinancing your auto loan might be a good idea. But, it is important to move forward . Consider refinancing if auto loan rates have decreased since you took out the car loan or your credit score has improved and you’re now eligible for a better rate. Refinancing is also sensible for those who are going through difficult financial times and require lower monthly vehicle payments to save money. If you’re paying the same interest rate, you may be able extend the loan duration, which will lower the monthly installment. You could seek a rather than refinancing, which involves adjusting the monthly payment amount, due date or interest rate for your existing loan. Refinancing is also an option when you have to add or modify the loan. Is it a good idea to refinance a car loan? There are some scenarios in which refinancing is not a great idea. A vehicle that is old or has a high mileage: If you own an older vehicle or one that has a an excessive mileage, it might be wise not to refinance. It’s not worth paying the cost of refinancing when you’ll have to replace your car in the near future. Refinancing fees outweigh the benefit If you’ve completed the majority of the initial loan amount, the cost related to refinancing could be more costly than the benefits. Applying for more credit soon: If you are applying for more credit or loans in the near future, you might be thinking about refinancing. Refinancing your car loan could trigger a hard credit inquiry , and reduce the average age of your accounts, which could affect the credit rating of your. You can’t find a favorable rate: If the rates you are offered don’t beat the current rate of interest it’s not a good idea to refinance. The bottom line There are your car loan. It can temporarily hurt your credit score. However, the financial benefits could far outweigh the loss in credit rating. There are other methods to limit the negative impact on your credit score, and also help it rebound when you are applying for refinancing. Before you decide if refinancing is a good idea, sense, familiarize yourself with the procedure to avoid unexpected surprises. Additionally, research the lenders, apply for prequalification and run the numbers to make an informed decision.


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

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 successfully get deals and make most informed decisions regarding their financial situation. He is a specialist in auto and small business loans.

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