The Impact of Car Loan Refinancing on Your Credit Score

Refinancing a car loan is a great way to save money. Does refinancing hurt your credit? The answer is yes but it would be temporary. “Fairly soon your score will return to where it was before the hard check,” as experts at Lantern by SoFi say.

The process can impact your credit score, which affects the interest rate you get on future loans. If you’re currently looking to refinance your auto loan, here’s how to prepare for that impact on your credit score and take steps to minimize it.

How Does Refinancing an Auto Loan Work?

Refinancing a loan is not an easy deal, to say the least. You need to have some clarity and context about the whole deal. We will primarily focus on the question, ‘Does refinancing a car hurt your credit?’

But first, we need to understand how car refinancing works. This will help you understand the whole deal with more clarity and understanding. But what is refinancing? Well, in simple terms, you take out a specific loan to pay off one loan.

While this is a common practice many people go for this option if they are facing financial trouble. Then again, you are taking out a specific loan to pay off another loan. This makes the whole deal more complicated.  Here is how it is beneficial to use refinancing for your car:

• It can help you save on the overall interest. Therefore, making it an important detail when it comes to interest rates.
• Reducing the monthly payment ratio is another benefit that form brings to the table.

Why Refinancing can Lower your Credit Score?

Refinancing has the potential to affect your credit score in a number of ways. First, if you are refinancing high-interest debt into a new car loan, it will increase your monthly payment and lengthen the amount of time you’re paying off that debt.

Refinancing also could have short-term effects on your credit score. When you apply for any type of loan or credit card, whether it’s opening an account or taking out a mortgage on a house, each new request can lower the average age of all accounts in your file by one year.

This may not seem like much, but over time, these small changes can add up and have significant impacts on where lenders place borrowers when considering them for loans or other types of financing, such as home equity lines of credit (HELOCs).

How to Reduce Impact on Credit?

The first step to reducing the impact of car loan refinancing on your credit score is to pay off any debt and keep your credit utilization low.

This means making sure that you can make payments on time. It’s also important not to close any accounts that you have opened, like credit cards and other loans. You should also try not to open new accounts or apply for any new ones while your car loan refinancing is going through the process.

You can do this by keeping all of your balances low (not maxing out any accounts). Another way would be simply paying off as much debt as possible before getting a car loan to refinance.

Additionally, if there are several lenders involved in helping with your auto financing needs, then they may want an updated report from each one every 6 months or so – so it might be a good idea not just because it improves their business practices but also because it will help protect against identity theft since someone won’t need to access only one company’s database about you.

How to Prepare to Refinance Your Car?

If you are thinking of refinancing your car, then it is important to prepare in advance. You should check your credit score and get a copy of your credit report. Research different rates and lenders that offer auto loans, as well as the terms and conditions they offer.

Having a steady income will help secure a lower interest rate when refinancing your car loan. Also, plan ahead for paying off this loan by having an emergency fund saved up or creating a budget that includes all monthly expenses before applying for refinancing options on an existing vehicle loan.

This article has helped you understand what refinancing your car can do to your credit score. If you’re thinking about refinancing and want to reduce the impact on your credit, the best thing to do is pay close attention to how much you owe and make sure it stays low. It’s also important not to miss any payments because missing payments will hurt more than anything else.

When is it Okay to Refinance A Car Loan?

The world of finance is a treacherous place to navigate. It takes a lot of understanding and clarity in order to operate. Therefore, understanding the right time is very important.

Therefore, only get a refinancing deal if you have some clarity and context about the general workings of refinancing and loan management.

Otherwise, your credit score might suffer to a great extent, and you do not want that.

The Final Thought

Well, the next time someone asks, ‘Does financing hurt your credit?’ show them this article. It might change the way they think. It can also help you put to rest any form of confusion that might arise in the long run.

With that note, we have come to the end of our discussion. If you liked this piece of content, then do let us know as we can help you get ahead of the discussion.

Read Also:

• 5 Mistakes to Avoid When Applying for a Car Loan
• 7 Benefits of Getting a Car Loan from a Credit Union
• Debt Consolidation Loans vs. Credit Card Refinancing: Best for You