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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.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate from late 2022. He values the clarity of his reporting, which 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 could get you better loan terms and also free up funds in your budget. But how will it affect your credit score? There’s a chance that you’ll see a slight reduction of your credit rating. But don’t steer clear of the possibility of having a reduced score. This could prove to be a wise choice that will result in costs savings or financial relief. What happens when you refinance an auto loan can affect credit refinancing a car loan could impact your credit score. This is because of the FICO credit score, which is provided by Fair Isaac Corporation. Fair Isaac Corporation. FICO scores are determined by the way you manage your credit, such as your credit history, your payment history, how much you owe in debt and the duration the history of your credit, as well as any recent credit applications — such as applications to refinance your auto loan. This credit scoring model may lower your score a couple of points when you make a new application for credit and a hard inquiry is logged on your credit report. In addition, the addition of a new account to your credit profile decreases the age average of credit accounts which can affect your overall FICO score. Here is a deeper analysis of how refinancing a car loan affects your credit score: It can trigger hard inquiries. Every time you make an application for an loan, there is a hard credit inquiry generated, which could cause a slight dip of your FICO score. Hard inquiries are in your credit file for as long as two years, but they only affect your score for up to 12 months. Consequently, — which is the process of applying for an additional loan can temporarily affect the score of your credit. The loan will lower your account’s average age. Also, refinancing lowers your average age of accounts, which can lead to the possibility of a reduction in your credit score. The good thing is that the age of your accounts only affects 15% of your credit score. Your score should improve quickly if you manage your finances properly the car loan and other accounts with debt. This is more significant if you report it as a brand new loan: If your loan refinance is reported as a “new” loan, it can have a greater impact on your credit score. The refinance won’t just result in a credit check, but will also have the effect of creating a new “open date” on your profile. When a new open day is found, it tells the credit agencies that you have accepted a new loan obligation, which will increase the total amount of debt. How long will your credit score suffer through refinancing? Although refinancing a car loan affects your score on credit, these effects are only temporary. Within a few months of uninterrupted payments your credit score should return to where it was before the refinancing. In certain cases the score may rise little. If you have any hard questions regarding refinancing, the score impact due to these inquiries will diminish entirely within an entire year. How can you limit the damage to your credit score Although your credit score might decline when you refinance but there are ways to : Get prequalified. Look around for the best rate on refinancing. Once you have a shortlist of your preferred lenders, you can to know about financing opportunities without impacting your score on credit. Apply within a specified time. If you make loan applications within a 14-day time frame, many credit scoring models will combine all of them into one single inquiry. This is referred to as rate shopping. It also helps minimize the impact upon your credit rating. Pay on time for auto loan payments. The most important aspect of your score on credit is the repayment history. It accounts for 35 percent, so paying your loan on time each month can boost your credit score back. Be patient when opening new credit accounts. Your credit score will be lower as you refinance. Refraining from creating new credit cards after refinancing can help increase this number and may raise your credit score in the future. How refinancing a car loan works If you’re looking to refinance your car loan, follow these guidelines to help make refinancing more seamless: Check your credit. Review your credit score to make sure that it’s not contaminated by errors, and then file a dispute to fix any issues you find. This step can be helpful . A better score of 670 or more — can increase your chances of securing a new loan with attractive terms. Find the top loan deals. There is no shortage of loans, which is why you must shop for the best deal. Review lender reviews and be prequalified to view loan offers you may qualify for. Make a formal application. Most banks, credit unions and online lenders offer easy online applications. You may also visit the branch or phone to apply. It is possible to receive a loan decision immediately, but the bank may need a bit to finalize your closing papers. Seal the deal. Go over all the loan documents and resolve any questions or concerns with the lender. After you sign the loan documents, you will be able to sign the loan with your current lender will provide you with an amount to cover your current loan or manage the transaction on its own. When to refinance your car loan There are many reasons why refinancing your auto loan could make sense. But, you must only take the next step . Refinancing is worth considering in the event that auto loan rates have decreased since you obtained 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 a rough financial patch and require lower monthly auto payments to free up funds. Even if you pay the same rate of interest, you might be able to extend the loan period, which reduces your monthly payments. It is possible to look into a more than refinancing, which involves adjusting the monthly payment amount and due date, or the interest rate on your existing loan. Refinancing is also an option in the event that you want to add or to the loan. Is it a good idea to refinance a car loan? There are a handful of scenarios where refinancing is not a good decision. Old vehicle or high mileage If you own an older vehicle or that has high mileage, it may be wise not to refinance. It’s not worth paying the cost of refinancing if you will have to replace your vehicle in the near future. Refinancing fees outweigh the benefit: If you’ve already paid off most of the initial loan value, cost 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 more credit or loans soon, you may consider rethinking refinancing. Refinancing your vehicle loan could trigger a hard credit inquiry and lower the average time to repay your loans, which could affect the credit rating of your. If you aren’t able to get a great rate: If the rates you are being offered aren’t competitive with your current interest rate it’s not a good idea to refinance. The bottom line is you’re paying the consequences of a car loan. It may temporarily harm you credit scores. However, the financial benefits may significantly outweigh a drop in credit score. There are ways to reduce the impact of your score, and also help it to rebound in the event of a refinancing application. Before deciding if refinancing makes sense, you should be familiar with the procedure to avoid unexpected surprises. Consider contacting lenders, get prequalified 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.
Editor: Helen Wilbers Edited by
Helen Wilbers has been editing for Bankrate since the end of 2022. He values transparent reporting that allows readers to successfully find deals and make the most appropriate choices regarding their money. He specializes in small business and auto loans.
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