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5 minutes read. Published 12 January 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 Credit.com.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He is a fan of the clarity of his reporting, which helps readers easily 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 the car loan could result in more favorable loan terms and free up funds in your budget. But what happens to your score on credit? You’ll likely see a small drop of your credit rating. But don’t steer clear of just because of a temporarily lower score. It could be a good choice that will result in cost savings or much-needed financial relief. Refinancing an auto loan impacts credit Refinancing a car loan can impact your credit score. This is because of the FICO credit score. This is offered through the Fair Isaac Corporation. FICO scores are calculated based on how they manage credit which includes your credit history, your payment history, how much you owe in debt, the time period the history of your credit, and even any recent credit requests — for example, applications to refinance your auto loan. This credit scoring model may lower your score a few points when you apply for credit, and a request for hard inquiry is logged in your credit file. Additionally, having the addition of a new account to your credit profile decreases the age average of credit accounts, and this can impact your overall FICO score. This article will take a closer review of how refinancing your car loan impacts your credit: It generates hard inquiries: Every time you make an application for an loan, an inquiry on your credit report is created, which can cause the slightest decrease on your score. Hard inquiries are visible on your credit reports for as long as two years, but they only affect your score for up to 12 months. This means that — if it involves applying for an additional loan — could temporarily impact the credit rating. It lowers your accounts’ average age. Refinancing also 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% of your credit score. Your score should bounce back quickly if you responsibly manage the new auto loan and other debt accounts. The impact is greater if it’s reported as a new loan: If your loan refinance is reported as an “new” loan, it is more likely to impact your credit profile. Refinancing will not just result in a credit check, but also carry the impact of creating a new “open date” on your profile. When a new open date appears, it informs the credit agencies that you have taken on a new debt obligation, increasing your overall debt load. How long will your credit score suffer when I refinance? Although refinancing a car loan affects your credit score, these effects are not permanent. After a couple of months of no payments your credit score will be back to the level it was before the refinancing. In some instances the score may rise little. If you have any hard inquiries related to your refinancing plan, the impact on your credit score from these will fall off completely within the course of a year. How can you limit the damage on your credit rating Although your credit score could decrease when refinancing, there are ways to : Get prequalified. Look around for the most affordable refinancing deal. When you’ve got a list of your preferred lenders, you can to view potential financing offers without impacting your credit score. You must apply within a specific timeframe. If you make loan applications within a 14-day period, the majority of credit scoring models combine the applications into one inquiry. This is known as rate shopping and can also lessen the impact of your score. Make timely auto loan payment. The most significant component of your score on credit is the repayment history. It’s responsible for about 35 percent which means that paying your loan in time every month will help your credit score bounce back. Be patient when opening new credit accounts. Your credit age will decrease when you refinance. The delay in the opening of new accounts for credit after refinancing will to improve this score and could increase your credit score in the future. What is the process for refinancing a vehicle loan is done When you are looking to refinance your car loan, follow these guidelines to help make refinancing more seamless: Check your credit report. Examine your credit score to make sure it’s free of errors, and then file a dispute to fix any issues you find. Taking this step can help . A higher score — 670 or above — increases your chances of getting the next loan with attractive rates. Find the best loan offers. There’s no shortage of loans, which is why you must shop for the best price. Read lender reviews and apply to look at loan deals you might be eligible for. Make an application in writing. Most banks, credit unions and online lenders feature easy online applications. You may also visit the branch or phone to submit an application. It is possible to receive a loan decision in a matter of minutes, however the lender may take some time to sign the closing documents. Sign the agreement. Check the loan documents and discuss any issues or questions you have regarding the lender. When you’ve signed the loan documents the loan documents, the new lender will issue you with an amount to cover the current loan or handle the transaction. When to refinance your car loan There are several reasons why refinancing your auto loan may be beneficial. But, you must only move forward . Refinancing is worth considering if you find that your auto loan rates have dropped since you took out the auto loan or your credit score has improved 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 are in need of lower car payments to free up cash. If you’re paying the same rate of interest, you might be able to extend the loan term, which lowers your monthly payments. It is possible to look into a more than refinancing. This involves changing the monthly amount and due date, or the interest rate for your existing loan. Refinancing is also an option when you have to add or modify the loan. When is it a bad idea to refinance an auto loan? There are several scenarios where refinancing isn’t a good option. Vehicles that are old or with high mileage: If you own an older vehicle or one that has a high mileage, it may be wise not to refinance. It’s not worth paying the cost of refinancing if you will have to replace your vehicle soon. The cost of refinancing is greater than the benefits: If you’ve already completed the majority of your original loan value, fees 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 in the near future, you might be thinking about refinancing. Refinancing your vehicle loan can trigger a inquiry into your credit and decrease the average age of your accounts, which could affect the credit rating of your. You can’t find a favorable rate If the rates that you’re given don’t match your current interest rate There’s no reason to refinance. The main point is that you are paying for your car loan. It could temporarily affect the credit rating of yours. However, the financial benefits may significantly outweigh a drop in credit rating. There are methods to limit the impact of your score, and also help it to rebound in the event of a refinancing application. Before deciding whether refinancing makes sense, you should be familiar with the process so that you don’t face any unexpected surprises. Also, explore the lenders, apply for prequalification and calculate the figures 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.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since late 2022. He values clear reporting that helps readers successfully find deals and make the most informed decisions regarding their finances. He specializes in auto and small business loans.
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