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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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He values clear reporting that helps readers successfully land deals and make the best choices for their finances. He specializes in small business and auto loans.
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Refinancing a car loan could get you more favorable loan terms and free money in your budget. But how will it affect your credit score? You’ll likely see a small reduction in your credit score. Don’t stay clear of the possibility of having a lowered score. This could prove to be a good decision that results in costs savings or financial relief. How refinancing a car loan can affect credit refinancing the car loan can impact your credit profile. This is due to you FICO credit score. It is a provided through Fair Isaac Corporation. Fair Isaac Corporation. FICO scores are calculated based on the way you manage your credit, which includes your payment history, how much debt you owe as well as the time period of credit histories and even any recent credit applications — for example, applications to refinance your car loan. The credit scoring model can lower your score a few points when you make a new application for credit and a hard inquiry is made in your credit file. In addition, the addition of a new account to your credit report decreases the age average of credit cards, and this can impact the overall score of your FICO. Here is a deeper analysis of how refinancing a car loan affects your credit score: It can trigger hard inquiries. Each time you make an application for a loan there is a hard credit inquiry is produced, which may cause an occasional dip in your credit score. Hard inquiries remain on your credit report for as long as two years, but will only affect your score for a period of 12 months. This means that — if it is the process of applying for an additional loan can temporarily affect the credit rating. The loan will lower your account’s average age. Refinancing also decreases the average age of accounts, which can lead to an eventual decrease in your credit score. The good thing is that the age of your accounts only affects 15 percent of your credit score. Your score should bounce back quickly if you responsibly manage your car loan and other debt accounts. The impact is greater if it’s reported as a new loan when a loan refinance is considered a «new» loan, it will more significantly impact your credit profile. The refinance will not only trigger a credit inquiry, but also have the added impact of creating the new «open date» on your profile. If a new open date is found, it tells the credit agencies you have agreed to a new obligation, which will increase your total debt burden. What is the length of time your credit score suffer by refinancing? While refinancing a vehicle loan can affect your score on credit, these impacts are not permanent. After a couple of months of no payments your credit score should return to where it was before the refinancing. In some cases it could even rise by a small amount. If you have any hard concerns regarding your refinancing, the impact on your score from these will fall off in a matter of a year. How to minimize the harm for your score Although your credit score could decline when you refinance however, there are several methods to get prequalified. Look around for the most affordable refinancing deal. When you’ve got a list of preferred lenders, get to view potential financing offers without impacting your score on credit. Apply within a specified time. If you make loan applications within a 14-day period, the majority of credit scoring models will combine them into a single inquiry. This is called rate shopping. It can also reduce the effect on your credit score. Pay on time for auto loan payments. The biggest factor in your credit score is your payment history. It accounts for 35 percent, so paying your loan punctually each month can aid in bouncing your credit score back. Be patient when opening new credit accounts. The age of your credit will decrease when you refinance. Holding off on opening new credit accounts after refinancing can help to improve this score and could increase your credit score in the future. How refinancing a car 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 the credit reports to make sure it’s clean of errors and file disputes to resolve any issues that you spot. Taking this step can help . A higher score of 670 or more — improves your odds of securing an additional loan with attractive conditions. Find the best loan deals. There is no shortage of , so you should shop around to find the best price. Read lender reviews and get prequalified to see loan deals you might be eligible for. Submit an official application. Many credit unions, banks and online lenders have easy online applications. You can also go to an office or phone to submit an application. You could receive a loan decision immediately, but the financial institution may take a bit to finalize your closing papers. Seal the deal. Check the loan documents and resolve any concerns or questions to the lender. When you’ve signed the loan documents, your new lender will issue you with a check to pay off your current loan or handle the transaction on its own. If you want to refinance your vehicle loan There are a variety of reasons that refinancing your automobile loan may be beneficial. But, it is important to proceed . It is worth looking into refinancing in the event that you find that your auto loan rates have decreased since you obtained your car loan or your credit score has improved, and you can now qualify for a better rate. A refinancing option is also an option when you’re in difficult financial times and require lower monthly auto payments to free up cash. Even if you pay the same rate of interest, you might be able to extend your loan period, which reduces your monthly payments. It is possible to look into a more than refinancing. This involves altering the monthly payment and due date, or the interest rate for your existing loan. It is also advisable to refinance in the event that you want to add or modify the loan. When is it a bad idea to refinance a car loan? There are a handful of scenarios where refinancing isn’t a good option. Old vehicle or high mileage If you own an older vehicle or with high mileage, it may be advisable not to refinance. It’s not worth paying the costs associated with refinancing when you’ll have to replace your vehicle soon. The cost of refinancing is greater than the benefits If you’ve paid off most of the initial loan amount, the costs associated with refinancing may outweigh the benefit. Are you planning to apply for 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 can trigger a credit inquiry and lower the average time to repay your loans, which could affect the credit rating of your. Can’t get a good rate: If the rates you are being offered aren’t competitive with the rate you currently pay There’s no reason to refinance. The bottom line is you’re paying your car loan. It can temporarily hurt the credit rating of yours. However, the financial advantages may significantly outweigh a drop in credit rating. There are other ways to minimize the impact of your score, and also help it rebound in the event of a refinancing application. Before deciding if refinancing makes sense, be aware of the process to avoid any unpleasant surprises. Additionally, research potential lenders, obtain pre-qualification, and run the numbers for a more 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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He values the clarity of his reporting, which helps readers easily land deals and make the most informed decisions regarding their financial situation. He is a specialist in small and auto loans.
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