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5 minutes read. Published 12 January 2023
Written 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 Credit.com.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since late 2022. He values clear reporting that helps readers confidently find deals and make the most appropriate choices regarding their finances. He is a specialist in small business and auto loans.
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Refinancing an auto loan could get you more favorable loan terms and free up funds in your budget. What happens to your credit score? It’s likely that you’ll notice a reduction on your score. Don’t stay clear of the possibility of having a reduced score. It could be a sound choice that will result in cost savings or much-needed financial relief. Refinancing an auto loan affects credit Refinance the car loan could impact your credit profile. This is due to you FICO credit score. It is offered through the Fair Isaac Corporation. FICO scores are determined by how the credit you have managed, including your payments history, the amount of debt you owe as well as the time period the history of your credit, and even recent credit applications — such as applications to refinance your vehicle loan. The credit scoring model can lower your score by a few points when you apply for new credit and an inquiry is made in your credit file. Also, a new account on your credit report decreases the average age of your credit cards, and this can impact your FICO score overall. This article will take a closer review of how refinancing your car loan can affect your credit score. It triggers hard inquiries Every time you apply for an loan there is there is a hard credit inquiry created, which can cause an occasional decrease on your score. Hard inquiries are in your credit file for up to two years, but they only affect your score for up to 12 months. Therefore, the process — which involves applying for an additional loan — could temporarily affect the score of your credit. It reduces your accounts’ average age. Refinancing also decreases the average age of accounts, resulting in the possibility of a reduction in your credit score. The good news is the age of your account is only 15% of the credit score. Your score should improve quickly if you responsibly manage the newly acquired auto loan and other accounts with debt. It has more impact if the loan is reported as a new loan when a loan refinance is considered a “new” loan, it is more likely to impact your credit score. Refinancing will not just result in a credit check, but also have the added consequence of generating an additional “open date” in your profile. When a new open day appears, it informs the credit bureaus that you’ve taken on a new debt obligation, increasing your overall debt load. How long will your credit score suffer when I refinance? While refinancing a vehicle loan affects your credit score, the effects are only temporary. Within a few months of payments that aren’t interrupted your credit score will return to where it was before the refinancing. In some cases, it may even increase by a small amount. If you’ve got any tough questions regarding refinancing, the impact on your score is likely to diminish in a matter of an entire year. How to minimize the harm to your credit score Although your credit score could decrease when refinancing, there are methods to get prequalified. Find the most affordable refinancing deal. When you’ve got a list of preferred lenders, get to look at financing options without affecting your credit score. Apply within a certain window. If you submit loan applications within a 14-day period, the majority of credit scoring models will combine all of them into one single inquiry. This is called rate shopping and can also reduce the effect upon your credit rating. 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 therefore, making sure you pay your loan in time every month can aid in bouncing your credit score back. Wait to open additional credit accounts. The age of your credit will decrease when you refinance. Refraining from creating new credit cards following refinancing will help improve this number and possibly increase your credit score in the future. Refinancing a car loan works If you’re ready to refinance your auto loan take these steps to make the process more seamless: Check your credit report. Review your credit report to make sure it’s free of errors, and file disputes to address any issues you find. This step can be helpful . A greater score — 670 or higher increases your chances of getting the next loan with attractive conditions. Find the top loan offers. There’s no shortage of , so you should shop around to find the best deal. Review lender reviews and apply to view loan deals you might be eligible for. Complete a formal application. The majority of banks, credit unions and online lenders feature simple online applications. You can also go to a branch or call in to make an application. You could receive a loan decision in a matter of minutes, however the lender may take some time to sign your closing papers. Seal the deal. Review all the loan documents and discuss any concerns or questions to the lender. After you sign, your new lender will send you a the funds to pay off the current loan or manage the transaction itself. If you want to refinance your vehicle loan There are many reasons that refinancing your automobile loan could make sense. But, it is important to proceed . Consider refinancing when auto loan rates have decreased since you have taken out your auto loan or you’ve seen your credit rating improve and you are now eligible to receive a better rate. A refinancing option is also an option when you’re in a rough financial patch and require lower monthly vehicle payments to save funds. Even if you receive the same interest rate, you may be able to extend the loan period, which reduces your monthly payment. You could seek a rather than refinancing. This involves adjusting the monthly payment amount, due date or interest rate for your existing loan. You should also refinance in the event that you want to add or modify the loan. When is it a bad idea to refinance an auto loan? But there are also some scenarios in which refinancing isn’t a good idea. Vehicles that are old or with high mileage If you’re driving an older vehicle or with an excessive mileage, it might be advisable not to refinance. It’s not worth the cost of refinancing if you will have to replace your car in the near future. The cost of refinancing is greater than the benefits: If you’ve already paid off most of your original loan sum, then the costs that come with refinancing might exceed the benefits. Are you planning to apply for credit soon: If you are applying for more credit or loans within the next few months, you may want to reconsider refinancing. Refinancing your car loan can trigger a credit inquiry , and reduce the average time to repay your loans, which can temporarily affect your credit score. Can’t get a good rate: If the rates that you’re given don’t match the current rate of interest There’s no reason to refinance. The bottom line is you’re paying your car loan. It may temporarily harm your credit score. However, the financial advantages can far outweigh a decline in credit rating. There are also ways to minimize the negative impact on your credit score, and also help it recover in the event of a refinancing application. Before deciding if refinancing makes sense, you should be familiar with the process to avoid any unexpected surprises. Also, explore lenders, get prequalified and then run the numbers to make an informed choice.
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Written by a 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 Credit.com.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He believes in the clarity of his reporting, which helps readers confidently get deals and make best choices for their financial situation. He specializes in small business and auto loans.
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