When you refinance your car, you take on a new loan to pay off your existing balance. Taking on a new refinance car loan means having a new interest rate and loan terms. Yet the purpose of getting a refinancing car loan is to eventually save money with a better interest rate, lengthen your loan term for an easier payoff, or reduce your monthly payment.
So, does refinancing a car hurt your credit? This is a common question people worry about when they are trying to cut costs and afford the things they need and want.
The financial experts at Western Shamrock are here to describe how to refinance a car loan and address your concerns about “Does car refinancing hurt your credit?”
How Refinancing a Car Loan Affects Your Credit Score
Yes, refinancing car loans does affect credit, but it is typically only a short-term, temporary effect. An auto loan refinance may be worth it because of the long-term benefits.
Short-Term Impact on Credit Score
Auto loan refinancing often causes a temporary dip in credit score due to the hard inquiry. The potential effects on credit scores come from a new loan being reported. However, this dip is usually small and doesn’t last very long for most borrowers.
Multiple Inquiries and the Rate-Shopping Window
Does refinancing a car hurt your credit if you are just shopping around for better interest rates?
Rate shopping impacts credit, and there is a 14-day window to minimize multiple inquiries. Therefore, submitting applications within a 14- to 45-day window is beneficial.
Factors That Determine How Much Your Score Will Decrease
However, every person’s lending situation is unique when it comes to refinancing car loans. For example, the effects could be more significant if you already have bad credit. If you are applying for other types of credit at the same time, such as a personal loan or mortgage, refinancing your car may have a harder hit on your credit score.
Here are some critical factors to remember about the impact on your score.
Hard Credit Inquiry
As you look into how to refinance auto loans, you’ll learn that there is a hard credit inquiry, and the lender’s credit check on your score will likely impact you.
Your credit score could drop up to five points because of this inquiry. The first hit to your credit score occurs when the lender pulls your credit report, and the second is when you actually take out the new loan.
New Loan on Credit Profile
Another factor to consider is that your refinancing car loan will be a new loan with a decreased average account age. Your new loan creates an open date and increases your overall debt load.
How Long Will Refinancing Affect Your Credit?
Although we’ve already established that the credit hit is temporary, many people wonder exactly how long an auto loan refinance will affect their credit.
The effects of taking out the new loan may only last for a few months. However, there is a possibility after that point that your credit score improves if you make timely payments. The hard inquiry will stay on your credit report for up to two years; however, it likely only impacts your credit score for up to a year.
How to Minimize Credit Score Damage When Refinancing
Fortunately, there are ways to minimize the damage to your credit score with auto loan refinancing. Here are some strategies to work into your financial plan if you refinance.
Prequalification to Avoid a Hard Inquiry
Check rates with prequalification before applying for a new loan to see what is available. Prequalification means you can see potential financing offers without having them affect your credit score.
Rate Shopping Within the Right Window
Take advantage of rate-shopping windows to minimize the credit impact when you refinance. If you submit a loan application within 14 days, this is typically considered a single inquiry. The window goes up to about 45 days, depending on the credit scoring model.
Paying on Time
On-time payments can help improve your credit score after refinancing car loans. Under the FICO model, payment history accounts for about 35 percent, so paying on time each month will help your credit bounce back quicker.
Holding Off on Opening New Accounts
While in the process of refinancing, it’s best to avoid opening other credit accounts during this time. When you refinance, your credit age decreases. But if you wait to open any new credit accounts until after you refinance your car, your credit score will likely improve quickly.
Is Refinancing a Car Worth the Credit Hit?
We hope that you now have a better understanding of the question, “Does refinancing a car hurt your credit?” and are prepared to make the best decision for your financial situation.
When It’s a Good Idea
Can you refinance a car loan now, and should you?
The lower interest rates refinancing brings could translate to long-term savings. The lower monthly interest payments can also make refinancing worth it. It may be worth refinancing a car if interest rates have dropped or your credit score has increased since you took out your original loan.
When to Avoid Refinancing
However, it’s best to avoid refinancing if you have negative equity, meaning you owe more than your car is worth. It’s also not advisable to refinance if you are nearing the end of your loan and want to avoid prepayment penalties.
Making the Right Choice for You
After weighing the pros and cons, does car refinancing hurt your credit too much to make it worth considering? You’ll need to weigh the short-term credit hit with the long-term financial benefits to answer this question. Borrowers should carefully assess their financial situations before refinancing and consider all available options before rushing to judgment.
For example, taking out a personal loan from Western Finance to get the flexible funds you need quickly may be advantageous rather than pursuing an auto loan refinance. Many people take out personal loans for car payments and auto-related expenses.
We also offer tax services to help you maximize your tax refund and have a merchandise financing program to help you afford costly electronics and appliances when needed. To learn more about how we can help you secure your financial future, please visit a local branch near you.
