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.
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 open, 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 account). 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.
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