Does Refinancing a Car Hurt Your Credit?

Key takeaways

• Refinancing an auto loan could impact your credit score in different ways.
• There are several options for lenders when it comes to refinancing.
• All things being equal, making your payments on time will help your score.

There are quite a few reasons why you might refinance an auto loan. Perhaps interest rates have dropped lower than on your original car loan and you’re looking to save money. Maybe your credit score has improved, and you think you might get a lower interest rate on a refinancing loan. Or you might be looking for a lower monthly payment to put more money toward your other expenses.

Whatever the reason, refinancing your car could be the solution you’re looking for. But does refinancing a car hurt your credit? The answer is, “It depends.” This article covers some details and nuances of auto refinancing, so read on to find out more.

Does refinancing a car hurt your credit?

Refinancing a car may affect your credit score in several ways.

Let’s say you apply for car refinancing, perhaps at a credit union or bank. One of the first things they’ll do is check your credit report. That will be what’s called a “hard inquiry.” This hard credit inquiry is recorded in your credit history as an attempt to acquire a new line of credit. This recorded attempt typically lowers your credit score by a few points, maybe 5 or 10. After about 6 months — if you haven’t applied for any other new credit — the lowering effect tapers off. So, in this case, refinancing a car loan might lower your credit score. It’s a small impact, however, and soon goes away.

But when you’re approved for the refinance loan, that loan may change your credit in other ways. Your new credit will go into your credit history, and payments made to your loan will beadded to your payment history. And adding an installment loan to your credit mix may also impact your score in a positive way, as you are diversifying your types of credit accounts. After a few months of making on-time car payments, you might see your credit score rise because you’re paying down your loan balance.

So, car refinancing might temporarily lower your score, but if you responsibly manage your payments, you may see your credit score rise over time.

How to reduce impact on credit

It may not always be possible to reduce the impact a new credit line will have on your credit score. But it doesn’t hurt to be in the know when you go to apply for a new loan.

The first thing to do is check your credit report. Get a free one from annualcreditreport.com – or enroll in Best Egg Financial Health and view your score and report in detail. You can identify and address any problems that might impact your loan approval, so you can address them beforehand – including potential errors. Make sure you inspect your credit report for any mistakes or missing beneficial credit references. Report any errors you find to the responsible credit bureau, as they are required to investigate and send you the results.

Keep all your credit inquiries bundled within a short time frame. VantageScore® provides a 14-day grace period for loan shopping and FICO® gives you 30 days. Bundling your inquiries limits the impact to a single hard inquiry on your record.

Another good way to reduce the impact of refinancing on your credit is checking to see if your lender offers loan prequalification without doing a hard inquiry. A “pre-qualification” gives you an idea of how much a lender will loan you, and what loan term they’ll provide. A longer loan term may lower monthly payments, but it also may increase the offered interest rate. It’s good to know how much money you’ll have to work with before you decide on refinancing a car.

Where can I refinance my auto loan?

There are multiple lenders out there who offer auto loan refinancing. You can always consult your local bank or credit union. Online shopping is very popular – it’s an easy way to explore rates and terms right from your home.

Some online lenders have loan calculators on their websites, and these types of tools can be helpful in deciding between different loan options. Whether you’re after a longer repayment period to reduce loan payments or you’re looking for the significant savings a lower interest rate brings, many online lenders make it easy to compare choices.

Can I do a cash-out auto loan refinance?

A cash-out auto refinance can be used when your original loan is paid off, and you’re also getting some money back from your new lender. It only works if your vehicle has positive equity (or, in other words, it’s worth more than your existing loan balance). This type of loan can provide you with extra funds for necessary large expenses and purchases, if you — and your vehicle — qualify.

Just remember the extra money you receive isn’t. You are borrowing the cash-out funds against your vehicle’s value. You’ll have to pay back everything borrowed, with interest.

No matter what kind of lender you select or the type of loan you use for refinancing, staying on top of your loan payments and monitoring your credit activity are good ways to build credit and make the process of refinancing your vehicle work in your favor.

This article is for educational purposes only and is not intended to provide financial, tax or legal advice. You should consult a professional for specific advice. Best Egg is not responsible for the information contained in third-party sites cited or hyperlinked in this article. Best Egg is not responsible for, and does not provide or endorse third party products, services or other third-party content.