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5 min read Published January 12, 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 decisions for their financials. He specializes in auto and small business loans.
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Refinancing a car loan can help you get better loan terms and also free the funds from your budget. But what happens to the credit rating of yours? There’s a chance that you’ll see a slight reduction in your credit score. But don’t steer clear of just because of a temporarily lowered score. This could prove to be a sound choice that leads to cost savings or a much-needed financial relief. Refinancing the car loan affects credit Refinance the car loan could impact your credit profile. This is because of the FICO credit score. This is given through the Fair Isaac Corporation. FICO scores are determined by the way they manage credit such as your payments history, the amount of debt you owe, the length of credit histories, as well as any recent credit applications — such as applications to refinance your car loan. The credit scoring model can lower your score by a few points when you apply for new credit and a hard inquiry is logged on your credit report. In addition, the addition of a new account to your credit profile reduces how old your credit accounts which also impacts the overall score of your FICO. Here is a deeper analysis of how refinancing a car loan impacts your credit: It can trigger hard inquiries. When you apply for a loan, a hard credit inquiry is produced, which may cause a slight drop in your credit score. Hard inquiries remain visible on your credit reports for as long as two years but only impact your score for a period of 12 months. This means that — if it is the process of applying for an additional loan can temporarily impact the credit rating. It lowers your accounts’ average age. Also, refinancing reduces the average age of your accounts, leading to an eventual lower credit score. It’s good to know that the age of your account is only 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. This is more significant if the loan is reported as a new loan When a loan refinance is considered a “new” loan, it can have a greater impact on your credit score. Refinancing will not just result in a credit check, but also carry the impact of creating an additional “open date” on your profile. If a new open date shows up, it tells the credit bureaus that you’ve agreed to a new obligation, thereby increasing the total amount of debt. How long will the credit rating of my client be affected when I refinance? Even though refinancing a car loan impacts the credit rating of your client, the effects are not permanent. After a couple of months of payments that aren’t interrupted, your credit score should return to where it was prior to the time you refinanced. In some cases the score may rise slightly. If you’re facing any difficult concerns regarding your refinancing, the impact on your score due to these inquiries will diminish entirely within an entire year. How to limit harm for your score While your credit score may decline when you refinance however, there are several methods to get prequalified. Look around for the most affordable refinancing deal. After you’ve compiled a list of preferred lenders, get to look at financing options without affecting your credit score. Apply within a specified time. If you submit loan applications within a 14-day period, the majority of credit scoring models will combine the applications into one inquiry. This is referred to as rate shopping. It can also reduce the effect on your credit score. Pay on time for auto loan payment. The most important aspect of your credit score is your payment history. It’s responsible for about 35 percent therefore, making sure you pay your loan punctually each month will help your credit score bounce back. Be patient when opening new credit accounts. Your credit score will be lower when you refinance. The delay in creating new credit cards following refinancing will improve this number and possibly increase your credit score in the future. How refinancing a car loan works If you’re ready to refinance your auto loan, follow these guidelines to help make refinancing effortless: Review your credit report. Review the credit reports to make sure that it’s not contaminated by errors, and then file a dispute to fix any issues you discover. Doing this can aid . A higher score — 670 or higher can increase your chances of securing the next loan with attractive conditions. Find the most attractive loan deals. There is no shortage of , so you need to shop around for the best price. Read lender reviews and be prequalified to view loan offers you may qualify for. Complete an application in writing. Most banks, credit unions and online lenders feature easy online applications. You can also visit the branch or phone to apply. You may receive a lending decision in a matter of minutes, however the bank may need some time to sign all the paperwork for closing. Seal the deal. Go over the loan documents and discuss any issues or questions you have to the lender. When you’ve signed the loan documents the loan documents, the new lender will issue you with a check to pay off the current loan or handle the transaction on its own. If you want to refinance your vehicle loan There are several reasons why refinancing your auto loan might be a good idea. But, you must only proceed . It is worth looking into refinancing if you find that your auto loan rates have dropped since you took out the auto loan and your score is improving, and you are now eligible to receive a better rate. Refinancing is also sensible if you’re going through an economic crisis and are in need of lower vehicle payments to save cash. If you’re paying the same rate of interest, you might be able extend the loan duration, which will lower the monthly installment. It’s possible to consider a better option than refinancing, which involves changing the monthly amount as well as the due date and interest rate for your existing loan. You should also refinance in the event that you want to increase or add to the loan. When is it a bad idea to refinance the car loan? But there are also several scenarios where refinancing is not a good decision. Old vehicle or high mileage: If you own an older vehicle or that has a high mileage, it could be wise not to refinance. It’s not worth the costs associated with refinancing if you’ll need to replace your vehicle in the near future. Refinancing fees outweigh the benefit If you’ve already paid off most of the initial loan amount, the costs that come with refinancing might be more costly than the benefits. Looking to apply for credit in the near future If you’re planning to apply for credit or loans within the next few months, you may consider rethinking refinancing. Refinancing your car loan can trigger a credit inquiry and lower the average age of your accounts which will temporarily lower the credit rating of your. If you aren’t able to get a great rate If the rates you’re being offered aren’t competitive with the current rate of interest There’s no reason to refinance. The bottom line There are the consequences of a car loan. It may temporarily harm your credit score. However, the financial advantages could far outweigh the loss in credit score. There are other ways to minimize the negative impact of your score and help it rebound when you are applying for refinancing. Before deciding if refinancing makes sense, be aware of the process to avoid any surprises. Also, explore potential lenders, obtain pre-qualification, and then run the numbers to make an informed choice.
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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 values the clarity of his reporting, which helps readers successfully get deals and make best choices for their finances. He is a specialist in small business and auto loans.
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