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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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate from late 2022. He is a fan of transparent reporting that allows readers to easily land deals and make the most appropriate choices regarding their finances. He is a specialist in small and auto loans.
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Refinancing a car loan can help you get better loan conditions and help you free the funds from your budget. But what happens to the credit rating of yours? You’ll likely see a small decrease of your credit rating. Don’t stay clear of simply because of a temporarily lowered score. The decision could turn out to be good choice that leads to costs savings or financial relief. Refinancing a car loan impacts credit Refinancing a car loan could impact your credit profile. This is due to the FICO credit score, which is a provided by the Fair Isaac Corporation. FICO scores are determined by the way they manage credit such as your payment history, how much debt you owe as well as the duration the history of your credit, and even recent credit applications — like refinancing your vehicle loan. This credit scoring model may lower your score by a few points if you apply for credit and a hard inquiry is made to your credit record. Additionally, having a new account on your credit profile decreases the average age of your credit accounts, and this can impact the overall score of your FICO. Here’s a more detailed analysis of how refinancing a car loan impacts your credit: It triggers hard inquiries Each time you make an application for an loan there is there is a hard credit inquiry created, which can result in a slight dip of your FICO score. Hard inquiries stay visible on your credit reports for up to two years, but will only affect your score for a period of 12 months. Consequently, — which is the process of applying for an additional loan can temporarily affect the credit rating. It lowers your accounts’ average age. Refinancing also lowers your average age of accounts, leading to the possibility of a decrease in your credit score. The good news is the age of your accounts only affects 15% on your score. Your score should bounce back quickly if you are able to responsibly manage your new auto loan and other accounts with debt. The impact is greater if it’s you report it as a brand new loan when a loan refinance is reported as an «new» loan, it is more likely to impact your credit score. The refinance will not only trigger a credit inquiry, but also have the added consequence of generating the new «open date» in your profile. If a new open date is found, it tells the credit bureaus that you’ve agreed to a new obligation, increasing your total debt burden. How long will your credit score suffer through refinancing? While refinancing a vehicle loan impacts your score on credit, these impacts are only temporary. 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 some instances, it may even increase little. If you’ve got any tough inquiries related to your refinancing plan, the impact on your credit score from these will fall off entirely within one year. How can you limit the damage to your credit score Although your credit score may decline when you refinance but there are ways to increase your credit score: Apply for prequalification. Shop around to find the best rate on refinancing. Once you have a shortlist of preferred lenders, get to know about financing opportunities without affecting the credit rating. Apply within a specified time. If you submit loan applications within the 14-day time frame, many credit scoring models will group the applications into one inquiry. This is referred to as rate shopping. It can also lessen the effect of your score. Make timely auto loan payments. The most important aspect of the credit rating is payment history. It’s responsible for about 35 percent which means that paying your loan on time each month can boost 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 in the wake of refinancing will increase this number and may increase your credit score over time. What is the process for refinancing a vehicle loan works If you’re in the process of refinancing your auto loan take these guidelines to help make refinancing more smooth: Check your credit report. Check your credit report to make sure that it’s not contaminated by errors, and file disputes to resolve any issues that you spot. Doing this can aid . A higher score — 670 or more — can increase your chances of securing a new loan with attractive rates. Find the top loan deals. There is no shortage of loans, which is why you should shop around to find the best deal. Review lender reviews and apply to look at loan offers you may qualify for. Submit an official application. The majority of banks, credit unions and online lenders feature simple online applications. You may also visit a branch or call in to submit an application. You could receive a loan decision right away, however, the financial institution may take some time to complete your closing papers. Sign the agreement. Review the loan documents and discuss any issues or questions you have with the lender. When you’ve signed the loan documents an agreement, you will be able to sign the loan with your current lender will provide you with a check to pay off the current loan or take care of the transaction. When to refinance your car loan There are many reasons that refinancing your automobile loan might be a good idea. But, you must only take the next step . It is worth looking into refinancing if you find that your auto loan rates have dropped since you took out the car loan and your score is improving and you’re now eligible for a lower rate. It is also a good option if you’re going through a rough financial patch and are in need of lower vehicle payments to save money. If you’re paying the same rate of interest, you might be able to extend your 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. You should also refinance if you need to add or to the loan. Is it a good idea to refinance an auto loan? But there are also several scenarios where refinancing is not a good idea. Old vehicle or high mileage If you’re driving an older vehicle or that has a an excessive mileage, it might be wise not to refinance. It’s not worth incurring the cost of refinancing if you’ll need to replace your vehicle soon. Refinancing costs are more expensive than the benefits If you’ve paid off most of the initial loan value, cost related to refinancing could exceed the benefits. Applying for more credit soon If you’re applying for credit or loans in the near future, you might be thinking about refinancing. Refinancing your car loan could trigger a hard credit inquiry and lower the average age of your accounts which could affect the credit rating of your. If you aren’t able to get a great rate: If the rates that you’re offered don’t beat your current interest rate There’s no reason to refinance. The bottom line There are the consequences of a car loan. It can temporarily hurt you credit scores. But the financial benefits could far outweigh the loss in credit score. There are also ways to reduce the impact on your credit score and help it to rebound when you apply for refinancing. Before deciding whether refinancing makes sense, you should be familiar with the process so that you don’t face any surprises. Also, explore potential lenders, obtain pre-qualification, and then 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 late 2022. He values transparent reporting that allows readers to successfully get deals and make most informed decisions regarding their finances. He specializes in auto and small business loans.
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