Will Refinancing My Car Loan Hurt My Credit Score?
Refinancing can be a great financial choice in many situations. It can save you money, lower your monthly payment, and reduce the length of your car loan. However, one question many people have is whether refinancing a car will hurt their credit score. This may be especially worrying if you are hoping to buy a house or take out another loan soon.
Refinancing your car loan might indeed result in a temporary dip in your credit score. While this should bounce back rather quickly, it’s still important to know how and why this happens. This can help you decide if refinancing is worth it given the potential impacts on your credit.
Any time you apply for a loan, not just those for refinancing, your credit score is checked. For approval, an inquiry will be placed on your credit which can temporarily cause your credit score to drop. To avoid this happening too many times, you’ll want to be aware of your credit score, and monitor your credit to see what soft inquiries or hard inquiries are placed on your credit.
Hard inquiries happen when a financial institution looks into your credit to determine if you are a trustworthy candidate for borrowing money. They influence your credit score because if potential lenders see a large number of hard inquiries over time for loan or credit products, it could signal the possibility that you may not pay back your existing debt.
The inquiry will stay on your credit report for approximately one year, but its impact only really lasts about six months. In addition, hard inquiries should only drop your credit score by five points or less.
Many borrowers understand too many hard inquiries can impact their score, however don’t let that stop you from rate shopping and applying for loans through more than one lender. If credit bureaus see multiple inquiries for the same type of loan product with a short amount of time, say 2 weeks, this is only registered as one inquiry. This limits the hit, as all of the inquiries will be registered as a single inquiry on your report.
Soft inquiries occur when you check your own credit, your credit score is checked for employment reasons, some lenders may also initiate a soft inquiry to determine a pre-approval status. Soft inquiries do not affect your credit score.
When you refinance your car loan, your old loan account will close when it is replaced with your new loan. This account closure can temporarily affect your credit score as well.
However, as long as your loan account was in good standing and you continue to make on-time payments on your new loan, this will quickly recover.
Because refinancing also opens a new account, this can also temporarily affect your credit score with a small dip in points. Since refinancing means you replace your original auto loan with a loan for approximately the same balance, this impact should be minimal.
If you continue to pay off your loan faithfully, this temporary decrease will resolve.
Is Refinancing Worth The Credit Score Impact?
While it’s important to monitor how your credit score is affected by your financial decisions, refinancing can save you a lot of money.
Refinancing can help you:
- Lower your monthly payments
- Shorten the term of your loan
- Lower your APR and the total interest you pay
As long as you continue to pay your loan off on time each month, your credit score should quickly rebound. Thus, unless you are needing to take out a big loan – like a mortgage–soon after an auto refinance, the small dip in credit will likely not influence your finances in the long run.
To weigh the pros and cons, though, make sure that it’s a good time to refinance, and that refinancing will actually save you money.
It’s typically a good time to refinance if interest rates have dropped, your credit score has improved, and your car is still maintaining its resale value. Alternatively, if you’ve found yourself in a tough financial spot and you need to lower your monthly payments, refinancing can help you accomplish this.
To know how refinancing will affect your monthly payments and the total amount of interest you will pay for your loan, you can use a financial planning calculator. This shows you how much money refinancing can save you, and if it’s worth the hassle.
Discover more about your options for refinancing below.