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Does car refinancing hurt your credit?

Does car refinancing hurt your credit? Learn some of the ins and outs of car refinancing and how refinancing your car can affect your credit.

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Auto Refinancing
July 1, 2021

Does refinancing a car loan hurt your credit score?

Refinancing your auto loan could temporarily lower your credit scores. However, do not let this deter you. Refinancing can be an excellent way to save money, depending on your financial circumstance.

In this article:

What is auto refinancing?

How does refinancing my car impact my credit score?

How to check your credit report

When should you refinance your car loan?

What is auto refinancing?

Auto Refinancing is the act of applying for a new loan to replace your current auto loan. Typically, people look to refinance their car loan because:

  • You may qualify for a better APR
  • You may need different loan terms
  • You need some flexibility in your budget and are looking to reduce your monthly payments

To understand more about what refinancing is, check out this blog

How does refinancing my car impact my credit score?

When you apply for a new loan or any line of credit, some factors can negatively impact your credit report. Most of the time, these credit score reductions are temporary. And in the case of auto refinancing are worth it due to the amount of money saved in the long term.

When considering refinancing, it is important to be aware of the three factors that can cause your credit score to go down.

Hard credit inquiries

Typically, the lender or financial institution will conduct a hard credit inquiry. Hard inquiries occur anytime you apply for a line of credit, such as a personal loan, mortgage, credit card, or car loan. A hard inquiry allows a lender to pull your credit report, evaluate your creditworthiness, and extend you a new loan offer. Hard credit inquiries are known to cause a temporary decrease in your credit score. Every lender and financial institution evaluates creditworthiness differently. At RateWorks, we review various factors and give leniency to less-than-perfect credit scores.

Closing an account

If you choose to refinance your vehicle, you are deciding to pay off the existing loan, otherwise known as closing the account and opening a new loan account. Some credit reporting models ding your credit score for a closed account. Depending on the credit score model, some may consider the length of credit history, but as long as you make on-time payments and close the account in good standing, the decrease in credit score should be minimal.

Multiple loan applications

Many people like to compare rates when shopping for an auto loan, but as mentioned above, hard inquiries can ding your credit score. If you plan to compare rates, Experian recommends conducting all of your inquiries between a 14-day to 45-day period so they will be treated as one inquiry, minimizing the impact on your credit score. Additionally, look for lenders that offer quotes with no credit check - like RateWorks. With our online quote tool, you can get an idea of how much you can save without impacting your credit score.

Does car refinancing hurt your credit?

How to check your credit report

As we have established, a new car loan affects credit. To fully understand how refinancing is affecting your credit score, you have to check your credit reports. You should check three reports at least once a year; Equifax, Experian, and TransUnion. You can check all three of these reports for free at AnnualCreditReport.com.

When should you refinance your car loan?

If interest rates have dropped.

If interest rates are lower than when you first took out your car loan, it could be a good time to consider an auto loan refinance. Even a lower interest rate by a few points could lower monthly payments.

If your credit score has improved

If you have improved your credit score since you initiated your original car loan, you may have the opportunity to get a better rate or loan term.

You are looking to lower your monthly payment

If you need to free up cash, refinancing can help relieve your financial pressures by providing a lower monthly payment on your vehicle. You can use the additional funds towards other monthly expenses, emergency expenses, or just to build a nest egg.

Taking out a new auto loan is a financial decision that should not be made lightly. It Is Important to understand the implications of taking out a new loan and how it can affect your credit score. Getting a quote that does not impact your credit score is the lowest-risk way to see if refinancing can offer significant savings. To get a free quote with RateWorks today, visit us here.

With RateWorks, you could start saving today!

Lower your auto loan payments, and lower your rate in a matter of minutes when you refinance your auto loan with us today! It's just that simple.