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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 values transparent reporting that allows readers to successfully get deals and make most appropriate choices regarding their finances. He is a specialist in auto and small business loans.
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Refinancing an auto loan can help you get more favorable loan terms and also free money in your budget. But how will it affect your credit score? There’s a chance that you’ll see a slight reduction on your score. However, don’t be afraid to stay away from the possibility of having a lowered score. It could be a sound decision that results in costs savings or financial relief. Refinancing an auto loan impacts credit Refinancing the car loan can impact your credit profile. This is due to your FICO credit score. It is a given through Fair Isaac Corporation. Fair Isaac Corporation. FICO scores are based on the way the credit you have managed, such as your payment history, how much you owe in debt as well as the time period of your credit history as well as any recent credit requests — for example, applications to refinance your auto loan. The credit scoring model can lower your score by a few points if you make a new application for credit, and a request for hard inquiry is placed on your credit report. In addition, a new account on your credit profile reduces the average age of your credit cards, which also impacts your overall FICO score. Here is a deeper review of how refinancing your car loan can affect your credit score. It triggers hard inquiries Every time you apply for an loan, a hard credit inquiry is created, which can result in an occasional drop on your score. Hard inquiries are on your credit report for as long as two years but only impact your score for up to 12 months. This means that — if it is the process of applying for the same loan could for a short period of time impact the credit rating. It lowers your accounts’ average age. Refinancing also reduces the average age of your accounts, leading to the possibility of a decrease in your credit score. The good thing is that the age of your account is only 15% of the credit score. Your score will improve quickly if you responsibly manage your new auto loan and other debt accounts. The impact is greater if it’s the loan is reported as a new loan When a loan refinance is reported as a “new” loan, it will more significantly impact your credit profile. The refinance won’t just result in a credit check, but also carry the impact of creating the new “open date” in your profile. When a new open day is found, it tells the credit agencies that you have agreed to a new obligation, increasing the total amount of debt. What is the length of time my credit score be affected by refinancing? Even though refinancing a car loan affects your credit score, these effects are not permanent. After a couple of months of no payments your credit score should get back to where it was before you refinanced. In some instances it could even rise by a small amount. If you’re facing any difficult inquiries related to your refinancing plan, the impact on your credit score from these will fall off in a matter of a year. How to limit harm to your credit score Even though your credit score might decline when you refinance, there are methods to get prequalified. Shop around to find the best rate on refinancing. Once you have a shortlist of your preferred lenders, you can to view potential financing offers without affecting your score on credit. Apply within a certain window. If you make loan applications within a 14-day timeframe, most credit scoring models will combine them into a single inquiry. This is called rate shopping. It also helps minimize the impact of your score. You must make timely auto loan payments. The most important aspect of your credit score is your repayment history. It accounts for 35 percent therefore, making sure you pay your loan punctually each month will aid in bouncing your credit score back. Do not wait to open new credit accounts. Your credit age will decrease when you refinance. The delay in creating new credit cards in the wake of refinancing will help increase this number and may improve your credit score over time. How refinancing a car loan is done When you are in the process of refinancing your auto loan Follow these guidelines to help make refinancing seamless: Check your credit report. Review the credit reports to be sure that it’s not contaminated by errors, and then file a dispute to fix any issues that you spot. Doing this can aid . A greater score — 670 or higher can increase your chances of securing the next loan with attractive terms. Find the best loan deals. There’s plenty of them , so you must shop for the most competitive rate. Read lender reviews and get prequalified to view loan offers you may qualify for. Make a formal application. The majority of banks, credit unions and online lenders feature easy online applications. You can also go to the branch or phone to apply. 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 address any concerns or questions with the lender. Once you have signed, the new lender will send you a the funds to pay off your current loan or handle the transaction. Refinancing your car loan There are a variety of reasons to refinance your car loan may be beneficial. But, you must only move forward . It is worth looking into refinancing when auto loan rates have decreased since you obtained the car loan and your score is improving and you are now eligible to receive a better rate. Refinancing is also sensible when you’re in difficult financial times and are in need of lower auto payments to free up cash. If you’re paying the same rate of interest, you might be able to extend the loan duration, which will lower your monthly payment. 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 of your current loan. It is also advisable to refinance when you have to add or to the loan. What is the worst idea to refinance an auto loan? However, there are some scenarios in which refinancing is not a great option. Old vehicle or high mileage: If you’re driving an older car or one with high mileage, it may be advisable not to refinance. It’s not worth incurring the cost of refinancing when you’ll have to replace your vehicle in the near future. Refinancing costs are more expensive than the benefits: If you’ve already completed the majority of the original loan amount, the cost that come with refinancing might exceed the benefits. Looking to apply for credit in the near future If you’re applying for more credit or loans within the next few months, you may be thinking about refinancing. Refinancing your car loan will generate a hard inquiry into your credit and decrease the average age of your accounts which could affect your score on credit. You can’t find a favorable rate If the rates you are offered don’t beat your current interest rate it’s not a good idea to refinance. The bottom line There are the consequences of a car loan. It may temporarily harm the credit rating of yours. But the financial benefits may significantly outweigh a drop in credit score. There are other ways to minimize the impact to your credit rating, and also help it recover when you apply for refinancing. Before you decide if refinancing is a good idea, sense, familiarize yourself with the procedure to avoid surprises. Consider contacting potential lenders, obtain pre-qualification, and calculate the figures to make an informed decision.
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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.
Edited by Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since late 2022. He is a fan of clear reporting that helps readers easily find deals and make the best choices for their finances. He is a specialist in small business and auto loans.
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