Will Refinancing My Car Hurt Credit

How To Shop For A Car Loan

When youre borrowing a significant amount of money, you will want to find the lowest interest rate possible. During this process, you will likely allow several auto lenders to run credit checks.

Multiple credit checks will deduct points from your credit score under normal circumstances, so excessive hard inquiries should be avoided. However, when it comes to auto loans, there is an exception.

Which Lender Provides The Best Auto Refinance Rates In Arizona

The refinance rates in Arizona vary depending on the individual, not the lender. Your APRs will depend on your credit score, loan amount, loan-to-value ratio, debt-to-income ratio, and more. Depending on that, you can get great rates from lenders like OneAZ Credit Union, Arizona Federal Credit Union, and Arizona Central Credit Union.

Why Refinancing A Car Hurts Your Credit Score

Again, when you refinance your car , youre paying off your old loan with a new one.

This will affect your credit score in three ways:

• Generating a hard inquiry: When you apply with your lender to refinance a loan, theyll perform a hard inquiry . This lets them assess your reliability as a borrower. Hard inquiries drop your credit score by several points, which is responsible for much of the damage that refinancing does to your score.
• Lowering your credit age: The length of your credit history contributes to your credit score. The older your credit accounts, the better. When you refinance your car, youre adding a brand new loan to your credit report, which will lower the average age of your accounts and lower your score.
• Closing a credit account: Your original loan will be closed when you refinance. If youve already paid off a decent amount of it, this may slightly depress your score because many scoring models give you a small boost for having a loan thats open but mostly paid off.

Its okay to shop around for refinancing options

Although normally each hard inquiry you receive will hurt your score, both FICO and VantageScore treat multiple inquiries for auto loans as a single inquiry as long as you incur them within a short period. This makes it safe to shop around for the best rates on your refinanced loan you wont be hurting your credit with each application. 1

How long will the effects of refinancing an auto loan last?

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How Refinancing Can Lower Your Credit Score

Refinancing a loan can lower your credit score in three major ways:

• Hard credit check on credit report. When youre shopping for the best refinancing terms, lenders typically evaluate your creditworthiness by running a credit check. If you rely solely on the prequalification process, this may be limited to soft credit checks that wont hurt your credit score. However, some lenders subject applicants to hard credit inquiries that stick around on credit reports for two years and can result in a drop in score of up to five points.
• Multiple loan applications. Each time you apply for refinancing with a different lender, the hard credit inquiry will reflect on your credit report and your score may drop. Luckily, you can limit this by applying through all of the lenders within a short period of timepreferably within a 14- to 45-day window, depending on the scoring model.
• Closed account. Refinancing a loan results in the original loan account closing, which reflects on your credit report. Ultimately, the impact of closing an account varies based on the size and age of the account, so keep this in mind when considering refinancing.

Review Your Current Loan

First, check the details of your current loan. Take note of details like:

• The loan total balance/payoff amount.

• The current interest rate.

• The current monthly payment.

Youll need this information to compare your existing loan to other options, and youll need the loan payoff amount in order to apply for a new loan.

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How Do Credit Scores Work

Its ideal to understand how credit scores work before diving into how auto loan refinancing hurts your credit score. Heres a breakdown of how your credit score is calculated:

• Payment history : If your credit card or loan accounts reach 30 days past due, the lender may report the delinquency to the credit bureaus. This negative mark could hurt your credit score by several points.
• Amounts owed : Your credit utilization ratio, or the amount of your credit limit in use, is the most significant factor in this category. So, if your credit limits across the board equal $1,000 and youre carrying a balance of $250, your credit utilization is 25 percent. Its best to keep this ratio at 30 percent or lower to get yourself the best shot at a good or excellent credit score.
• Length of credit history : The longer youve had credit history, the better your score.
• Lenders want to know that you can manage both revolving and installment accounts.
• New accounts : applying for too much credit in a short span is a red flag to lenders and could hurt your credit score. Rate shopping is an exception to the rule. More on that shortly.

Quick note: This is the formula for the FICO score, which 90 percent of creditors use to make a lending decision. Other less popular credit scoring models, like VantageScore, use variations of this calculation or a different formula altogether.

Your Credit Score Has Increased

Your credit score may have been lower when you took out your original car loan than what it is today. If youve earned a substantially higher credit score in the year or so after you took out your car loan, you may want refinance. Chances are youll be able to lock down a car loan with a much better interest rate.

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Time Remaining On Your Loan

Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.

If your answer to When should I refinance my car loan? is Soon, review our current refinance rates and take a look at our auto loan refinance calculator to get a better understanding of whether refinancing makes sense for you.

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Improve Your Credit Score Beforehand

Your credit score is important. Its a number that indicates to lenders how likely you are to repay debt. The higher your score, the better rates youll be offered on loans.

If youre considering refinancing your auto loan, its a good idea to check your credit score beforehand and take steps to improve it if necessary.

How do you improve your credit score easily and quickly? Always pay your bills on time, lower your credit utilization rate, and work towards paying off large debts.

Taking these steps will not only help you get the best rates on loans, but it will also save you money in the long run.

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How Can You Reduce The Impact Of Auto Refinancing On Your Credit

If youre someone whos struggled with maintaining a decent credit score and dont want multiple hard inquiries to tarnish it at once, you can always shop around for rates with lenders that offer a pre-qualification process.

• Pre-qualification or pre-approval for auto refinancing involves a soft credit check which will not affect your credit score. Based on the soft credit inquiry, you will be shown a list of offers that you have been pre-approved for. However, this is only a way to compare the rates and benefits offered by each deal. Once you finalize an offer, you will still have to go through a hard credit inquiry which will affect your credit score. There could be some difference in the terms offered in the final offer as well.

• If youre hell-bent on reaching out to multiple lenders for final offers, be ready for several hard inquiries. However, an advantage of this is that if you undergo several inquiries in a short period, most credit agencies will bundle them and treat them as a single inquiry. VantageScore has a 14-day window for hard inquiries of the same loan type, while FICO has a 45-day window.

You can also minimize the impact of car refinancing on your credit by improving your score in the months leading up to your application. You can do this by:

• Checking your credit reports regularly and tracking any risk factors
• Being on time with your current payments
• Clear any pending dues, past-due accounts, and other fees
• Applying for credit only when you need it

The Basics Of Trading In A Car

Trading in your car for a lower-priced model is another way to achieve lower monthly payments. This isnt always easy, as dealerships offer varying trade-in values. You may have to search for the dealer that gives you the trade value that suits your needs.

In some instances, you can get more for your old car by selling it to a private buyer. You can take the proceeds from a private sale to fund a down payment on a new car thats a better fit for your current budget.

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Auto Refinance In Todays Economy

Its not surprising that people are struggling with finances. Recent Census Bureau shows that about 40% of adults are experiencing difficulty keeping up with basic household expenses.

One avenue for potential savings? Auto loan refinance. Many auto refinance companies currently tout a monthly payment drop of about $100, and a few others claim their average customer saves closer to $150.

Monthly new car payments have been affected as well: about 13% pay more than $1,000 per month, almost twice as many people as last year.

Used car prices have gone up too, sometimes surpassing the cost of a newer version of the same make and model.

However, auto refinance remains a viable option. A lot of companies will even work with borrowers with car loans originated as recently as one month ago.

Auto Refinance In Arizona

Too many Arizonans are finding themselves locked into bad auto loans – with high APRs, monthly payments, and inflexible loan terms. Between this and rising vehicle expenses, your wallet could be empty before the end of the month.

Don’t worry – replacing your auto loan is now less of a hassle with Arizona auto refinancing!

• Auto refinancing in Arizona lets you take a new loan with better terms and conditions while paying off the old loan.
• The new loan will typically have a lower APR , better loan term , lower monthly payments , and much more benefits.
• The new lender will pay off the remaining loan balance with the old lender , which lets you start paying reduced monthly payments on the new loan.
• The new Arizona auto refinance rates give you the benefit of choice . You can choose from several pre-qualified refinance offers that fit your budget.

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Is It Bad To Keep Refinancing Your Car

Legally, there is no limit to the number of times you can refinance your car. However, every time you apply for refinancing, you have to meet the lenders eligibility criteria like minimum payoff amount, loan terms, minimum credit score, and vehicle equity. Its highly unlikely that you will be able to meet all of their criteria. Additionally, borrowers who refinance their auto loan multiple times can be seen as financially irresponsible and rejected. Therefore, we would advise you not to refinance your car more than two times.

Find new loan rates you are comfortable with and save money in the long term with auto loan refinancing!

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You May Not Qualify For A Top Rate

If it has only been a short time since you got your initial loan, your credit score still may be suffering from the temporary hit from a hard inquiry to your credit report, especially if youve also applied for other types of credit, such as a mortgage or one or more credit cards. Your refinancing rate may also be affected if you were late on or missed loan payments, or you havent had the loan long enough to demonstrate that youll consistently pay on time, especially if you dont have a long credit history.

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Refinancing A Car Thats Too Expensive

If a refinanced car payment would still stress your budget, consider trading in your vehicle and getting a less expensive car. Heres a guide on how to determine whether to trade in or refinance your car.

If you owe more than your car is worth, negative equity can make it hard to refinance. It may be smarter to pay down the loan balance before taking the next step.

Interest Rates Are Down

If you see that interest rates are down, it may be a good time to refinance your auto loan. A drop of two or three percentage points could give you significant savings over the life of your loan.

This is especially true if you still have a couple of years left on your loan, refinancing could help you save money. However, be mindful of the fact that your credit score will ultimately determine the interest rates you get.

Before you refinance, consider your current financial situation and whether you can afford the new monthly payment. Youll also want to compare interest rates and terms from different lenders to get the best deal.

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You Financed Your Current Auto Loan Through A Dealership

Dealerships may not offer you the best rates available. If you took out your loan through a dealer especially without negotiating the interest rate refinancing could potentially save you thousands of dollars over the remaining life of the loan.

If youre shopping around for the best interest rate, consider checking out auto refinance rates at a financial institution where you already do business. For many bank members, this could mean accessing special discounts.

For example, Chase offers a 0.25% interest-rate discount if youre a Chase Private Client. And Bank of America Preferred Rewards customers may qualify for a rate discount of up to 0.50%.

When It Doesnt Make Sense To Refinance

• Youre upside down on your current loan. You shouldnt refinance your car loan if you owe more on your current vehicle than its worthalso known as being upside down, which means you have negative equity.
• Youll be hit with a prepayment penalty. Another reason not to do it is if your current lender has a prepayment penalty in place that costs more than any potential savings.
• Youre currently applying for another loan. If youre applying for another loan, like a mortgage, refinancing your car loan at the same time isnt ideal. Your credit score would be negatively impacted, making it hard for you to get the loan, or you could be saddled with a higher interest rate.
• You have a low balance on your current loan. If you have a low outstanding balance on your existing car loan, it doesnt make sense to refinance. Instead, you should either pay it all off to free up room in your budget or keep making payments to make your credit record as strong as possible.

Its important to remember that the longer you take to repay your loan, the more interest youll have to pay over time. So be sure to use an auto loan calculator to see if refinancing will save you money before making your final decision.

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Does Refinancing Your Car Hurt Your Credit

If you’ve started thinking about refinancing your car, you might be concerned about what it can do to your credit.

It’s true that refinancing your car loan can cause a temporary dip in your credit score.

But in most cases, this isn’t that big of a deal. For one, after the new loan comes into effect, it usually doesnt take too long for your credit score to get back to normal.

For many people, this small dip in their credit score is well worth the financial savings in the long run, such as lower interest rates or lower monthly payments.

How Refinancing Your Car Can Affect Your Credit Score

Your credit score is calculated based on factors related to your debt and how you repay that debt, e.g., do you always make payments on time? What is your credit history length?

These are factors of your score because they attempt to predict how likely you are to repay your debt.

Your credit score might dip when you apply for new credit

So when you do an application for a new loan, your score takes a hit because the lender runs a credit check. When you accept that new loan, your score takes another hit because you are taking on new debt, which statistically puts you at a greater risk of missing payments.

Usually, a dip when refinancing a car is only temporary

While this can all seem like its totaling up to take a big hit to your credit score, its usually not as bad as it sounds.

For one, because youre refinancing , the impact on your credit score wont be as big as it would be if you were to take on a new loan of a completely different, higher value.

Plus, the long-term effects are usually easy to avoid. In most cases, after just a few months of unmissed payments, your score will go back up.

As for the effects of the hard inquiry , that usually disappears from your credit score within a year.

On your credit report, youll see your new loan appear. Your original car loan will stay on your report for up to a decade, but it will be marked as closed in good standing.

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