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5 min read 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.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate from late 2022. He believes in clear reporting that helps readers easily land deals and make the best choices for their finances. He is a specialist in small business and auto loans.
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Refinancing the car loan can help you get better loan terms and also free up funds in your budget. But what happens to your credit score? You’ll likely see a small drop of your credit rating. However, don’t be afraid to stay away from simply because of a temporarily lowered score. The decision could turn out to be sound choice that will result in cost savings or a much-needed financial relief. Refinancing an auto loan affects credit Refinance a car loan could affect your credit profile. This is due to you FICO credit score. This is provided through Fair Isaac Corporation. Fair Isaac Corporation. FICO scores are calculated based on the way the credit you have managed, which includes your payments history, the amount of debt you owe as well as the duration of your credit history and even recent credit applications — for example, applications to refinance your car loan. The credit scoring model could lower your score by a few points if you apply for new credit, and a request for hard inquiry is logged in your credit file. In addition, a new account on your credit profile reduces the average age of your credit accounts, which also impacts the overall score of your FICO. Here is a deeper review of how refinancing your car loan can affect your credit score. It triggers hard inquiries Each time you apply for a loan there is an inquiry on your credit report is produced, which may cause an occasional dip of your FICO score. Hard inquiries stay on your credit report for as long as two years, but will only affect your score for up to 12 months. This means that — if it involves applying for an additional loan can temporarily impact the score of your credit. It lowers your accounts’ average age. Also, refinancing lowers your average age of accounts, leading to a possible decrease in your credit score. The good news is account age only counts for 15% of your credit score. Your score should bounce back quickly if you manage your finances properly the newly acquired auto loan and other debt accounts. It has more impact if reported as a new loan: If your loan refinance is reported as an “new” loan, it can have a greater impact on your credit score. The refinance won’t just generate a credit inquiry but also have the added consequence of generating a new “open date” in your profile. If 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 the credit rating of my client be affected by refinancing? While refinancing a vehicle loan impacts your credit score, the effects are not permanent. Within a few months of payments that aren’t interrupted your credit score will return to where it was prior to the time you refinanced. In certain cases it could even rise slightly. If you’re facing any difficult inquiries related to your refinancing, the impact on your score due to these inquiries will diminish completely within the course of an entire year. How to limit harm for your score Even though your credit score could drop when you refinance however, there are several ways to increase your credit score: Apply for prequalification. Shop around to find the best deal on refinancing. After you’ve compiled a list of preferred lenders, get to know about financing opportunities that won’t affect your score on credit. Apply within a specified time. If you submit loan applications within a 14-day time frame, many credit scoring models will group all of them into one single inquiry. This is referred to as rate shopping. It also helps minimize the impact on your credit score. You must make timely auto loan payment. The most significant component of your credit score is your repayment history. It is responsible for 35 percent of your credit score which means that paying your loan on time each month will boost your credit score back. Be patient when opening new credit accounts. The age of your credit will decrease when you refinance. The delay in the opening of new accounts for credit in the wake of refinancing will improve this number and possibly improve your credit score over time. Refinancing a car loan is done When you are in the process of refinancing your auto loan, follow these steps to make the process more seamless: Check your credit report. Check your credit report to be sure that it’s not contaminated by errors, and file disputes to address any issues you find. Taking this step can help . A better score of 670 or more — increases your chances of getting an additional loan with attractive conditions. Find the top loan deals. There’s no shortage of , so you should shop around to find the best deal. Check out lender reviews and apply to view loan offers that you could be eligible for. Make a formal application. Many credit unions, banks and online lenders offer easy online applications. You may also visit an office or phone to submit an application. It is possible to receive a loan decision immediately, but the bank may need some time to sign your closing papers. Sign the agreement. Go over your loan documents and resolve any questions or concerns to the lender. Once you have signed the loan documents, the new lender will send you a an amount to cover your current loan or manage the transaction itself. Refinancing your car loan There are a variety of reasons that refinancing your automobile loan might be a good idea. But, you must only move forward . It is worth looking into 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’re now eligible for a lower rate. Refinancing is also sensible for those who are going through a rough financial patch and require lower monthly car payments to free up money. Even if you pay the same rate of interest, you might be able extend the loan term, which lowers your monthly payments. You could seek a rather than refinancing. This involves changing the monthly amount, due date or interest rate for your existing loan. Refinancing is also an option in the event that you want to add or to the loan. What is the worst idea to refinance the car loan? But there are also some scenarios in which refinancing is not a good decision. Vehicles that are old or with high mileage If you own an older car or one that has high mileage, it may be advisable not to refinance. It’s not worth paying the fees associated with refinancing if you will have to replace your vehicle in the near future. The cost of refinancing is greater than the benefits If you’ve paid off the bulk of the initial loan sum, then the fees that come with refinancing might outweigh the benefit. Applying for more credit soon If you’re planning to apply for credit or loans within the next few months, you may want to reconsider refinancing. Refinancing your vehicle loan could trigger a hard inquiry into your credit and decrease the average age of your accounts, which could affect your credit score. You can’t find a favorable rate If the rates you’re given don’t match the current rate of interest, there’s little 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 other methods to limit the impact to your credit rating, and also help it recover when you are applying for refinancing. Before you decide if refinancing is a good idea, sense, be aware of the procedure to avoid unpleasant surprises. Also, explore potential lenders, obtain pre-qualification, and calculate the figures to make an informed decision.
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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 is a fan of clear reporting that helps readers confidently get deals and make most appropriate choices regarding their money. He specializes in small business and auto loans.
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