Next Steps After Refinancing A Loan
The process of refinancing a loan itself can seem involved, but getting lender approval doesnt mean your work is done. Once you refinance your loan, make sure you continue making payments on your original loan until the process is complete. Then, continue making on-time payments on the new, refinanced loan until its paid off.
It may also be helpful to continue monitoring your credit score after the refinancing process is complete. Your score will likely experience a drop, but this is normal and the related credit inquiries will naturally fall off your credit report after two years. To protect your credit profile, just confirm that there arent more hard inquiries on your report than necessary, and review the new loan details to make sure theyre updated in accordance with the refinancing terms.
Will Refinancing A Car Hurt Your Credit
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Refinancing a car can save you money on interest or give you a lower payment and some breathing room in your budget.
When you refinance a car loan, it could temporarily ding your credit score, but its unlikely to hurt your credit in the long run.
When Your Credit Will Dip
If you choose to apply with a company that makes a hard inquiry of your credit, then you can expect a slight drop in your score soon after. After this initial drop, youll see another after going through with refinancing.
Auto refinancing comes with a temporary credit drop. This drop is expected any time you refinance a loan. The decrease occurs because the first few months after refinancing are the most likely time for borrowers to miss payments. But the good news is that you can right this temporary drop by paying your bills on time. After a few months of regular payments, youll see your score return to normal.
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Does Refinancing A Car Lower Your Credit Score
Refinancing a car loan is when you pay off your existing car loan with a new loan, ideally a new loan that has better terms and a lower car loan APR. So how exactly does car refinancing affect your credit score? To understand this, we must first look at how credit scores are calculated.
Factor #1: Payment History
Your payment history makes up 35% of your credit score. Do you make your payments on time? Are your payments in full? Are they consistent? This section of your credit report will show lenders how dependable you are when it comes to paying your debts. It will show any missed payments or bankruptcy details.
Factor #2: Accounts Owed
Your accounts owed make up 30% of your credit score. How much money do you owe compared to how much money you have available to you? This section shows lenders if you are responsible with the credit that you have available to you. This section looks at your credit utilization ratio, which is a ratio of your total debt compared to your total credit available. The lower your ratio is, the higher your credit score will be. Typically lenders like to see that this number is below 30%.
Factor #3: Length of Credit History
The length of your credit history accounts for 15% of your credit score. The longer you have had credit, the higher your score will be. This shows lenders that you have good and steady relationships with your existing accounts.
Factor #4: Credit Mix
Factor #5: New Credit
How Refinancing Affects Your Credit Score
So how does refinancing your car loan affect these categories? Car refinance will affect two main categories on your report: your history length and your new credit. When you open a new account, it will shorten your credit history length. It will also count as a new credit and the hard inquiries will be noted in your credit report.
Note: A hard inquiry occurs when a lender asks to see your credit report. It counts as a ding on your credit report because it shows that you are seeking a debt that is not yet noted in your credit report. BUT. Hard inquiries only stay on your credit report for about a year, so it is a temporary ding. Credit bureaus also know that people need to shop around for loans, so they allow a two week timeframe where all inquiries on your credit count as one hard inquiry. Dont let a fear of multiple hard inquiries prevent you from applying to different lenders for your car refinance.
Your credit score will most likely take a slight dip when you refinance. Car loan refinancing may still increase your credit score in the long run however.
Refinancing your loan to a lower car loan APR can save you a significant amount of money each month. So if you have been struggling to make payments, a refinance can ease that burden and allow you to make more consistent and on time payments, increasing your payment history score.
If you do not have a good mix of credit, adding in a car loan can be beneficial to your credit mix as well.
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Save Money On Interest
Perhaps the number one reason people refinance their car loans is to try to get a lower interest rate. This is one of the biggest ways for you to save money over time.
As you shop around to refinance your car, make sure you check out average loan rates based on credit scores to give you an idea of market conditions.
How Does Refinancing A Car Lower Your Payment
You may be able to reduce your monthly payment amount by lowering your interest rate and/or lengthening your loan term. By refinancing into a loan with a longer term, you can make smaller payments over a longer period of time. Just be aware that this strategy can result in a higher total interest cost over the life of the loan.
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What Is Credit Score And How Is It Calculated
Your is one of your most important pieces of financial information. Lenders use this three-digit number to determine everything from whether you qualify for a loan to what interest rate youll pay. But how is this number calculated, and what factors can impact your score?
FICO is the most common credit-scoring model in the United States, with more than 90% of lenders using it. FICO scores range from 300 to 850 the higher your score, the better. Five factors are used to calculate your FICO score: payment history , credit utilization , length of credit history , credit mix , and new credit .
Does Car Refinancing Affect Your Credit
The first thing we need to cover is the additional inquiry. When you apply for auto refinancing, a company will often perform a hard inquiry into your credit, which can cause a temporary drop in your score. This inquiry-related drop makes it difficult to compare the services of multiple companies.
The good news is that not every company needs to perform a hard inquiry into your credit. Some companies, like Gravity Lending, can conduct a soft inquiry instead. This soft inquiry wont affect your credit, allowing you to compare rates from other companies. When refinancing your car, prioritize services that wont affect your credit for exploring your options.
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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.
How Does Auto Loan Refinancing Affect Your Credit
Whenever you apply to refinance your car, the lender will pull your credit score to check what APR is best to offer you. This is called a hard credit inquiry and will cause your credit score to drop by a few points. Its also why you should refinance only after building your credit score above what it was when you first applied for your loan.
- While a credit drop is inevitable, you can reduce the magnitude of the drop by building your score to above 700
- You can also pre-qualify with several lenderswhich only need a soft credit pull
- FICO and VantageScore allow rate shopping within a certain window . They consider multiple inquiries within this period as one single inquiry as long as they are performed within this window.
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Refinancing Can Hurt A Little Bit
Refinancing your vehicle means paying off its current loan and replacing the loan with another one, usually with the intent of getting a lower monthly payment.
By paying off the original loan on the car, youre closing one account and opening another. Youre also applying for new credit since refinancing involves applying with a lender thats going to request your credit reports. Thats three different points of activity: applying for new credit, closing an account, and opening up a new account.
This activity impacts two different aspects of your FICO credit score, which can cause a slight drop in points:
- New credit 10% The new credit category keeps track of how many times you apply for a new line of credit. A lender looks at your credit reports, which can cause a drop in points anywhere from five to 20 points, depending on your current credit history and score. The hard inquiry from applying for refinancing can harm your credit score for up to 12 months.
- Length of credit history 15% This aspect of the FICO credit score takes into account the length of your credit history, and the average age of all your credit lines the older the better. By closing one account and opening another, youre decreasing the average age of all your active credit lines, which can hurt your credit score temporarily until the accounts mature.
How To Shop Around And Compare Lenders
In addition to your current lender, you should compare the offerings of auto finance companies, online lenders, traditional banks and credit unions. This will ensure you get the best rate possible.
Keep in mind that applying for an auto loan refinance counts as a hard inquiry on your credit report, which could cause your credit score to drop by a few points. If you submit all the applications within a certain period of time, however, theyll count as a single inquiry.
The time frame is typically between 14 and 45 days. This limits the negative impact on your credit score and allows you to explore as many options as you want.
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What Is Auto Refinancing
Auto Refinancing is the act of applying for a new loan to replace your current auto loan. Typically, people look to refinance their car loan because:
- You may qualify for a better APR
- You may need different loan terms
- You need some flexibility in your budget and are looking to reduce your monthly payments
To understand more about what refinancing is, check out this blog
Refinance Benefits Outweigh Temporary Credit Score Ding
An auto loan refinance isnt bad for your credit after all. While your score could drop a few points temporarily, you could enjoy lower car payments while taking advantage of falling market rates. Remember to do your rate shopping within the right time frame to avoid additional hard credit checks.
Dont let a temporary, small hit on your credit score scare you from refinancing your car loan. Rate shopping, reviewing your credit, and getting prequalified can minimize any negative impact refinancing might have on your credit score.
Ready to refinance your car loan?
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Get Fast Access To Cash
Sometimes people refinance because they need to get their hands on some cash fast.
This is known as a cash-out refinance.
For example, suppose your car is worth $20,000. Based on what youve already paid, you owe $12,000. If you do a cash-out refinance for the full $20,000, youll be left with $8,000 in cash.
Beware: This means youll have a pretty big loan again and will need to start from the beginning to pay it off. But if youre in a tight spot and can’t turn to your emergency fund, a cash-out refinance may be able to help you.
When Should I Refinance My Current Auto Loan
If youre thinking about refinancing an existing car loan, you should consider the following:
The Savings
Do you need to save money right now? Auto refinancing can unlock lower interest rates that will give you lower payments and financial relief right now.
Youre Behind on Payments
Not being able to make payments can hurt your finances and lower your credit score. A new loan will help you protect your credit so that it will be intact when you need it for other purchases
The Original Auto Loan Lender
If you got your current loan from the auto dealer, theres a chance that you are paying a higher interest rate than you need to. Interest rates change over time, and you may be able to find a new loan through refinancing that is better than your original loan. Auto refinancing can provide new options at competitive rates.
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How We Chose The Best Auto Refinance Companies
When looking for the different auto refinance companies in the industry, we considered several criteria.
- Financial stability – We looked at each companys financial stability to make sure theyd be able to meet their refinancing obligations.
- Loan options – We looked for auto refinancing companies that offered competitive interest rates, zero to no upfront fees and flexible or reasonable vehicle restrictions.
- Customer experience – We looked at each companys complaints with the Consumer Financial Protection Bureau or the Federal Trade Commission . We also checked whether each company was transparent regarding its partners, underwriters and fees.
- Financial products – We also took into account each companys array of financial products and interviewed representatives from some companies.
We also interviewed representatives from companies as part of our research process. Still, though we always try to include accurate and up-to-date information on regulatory and legal actions, we dont claim this information is complete or fully up to date. As always, we recommend you do your own research as well.
You Are Looking To Lower Your Monthly Payment
If you need to free up cash, refinancing can help relieve your financial pressures by providing a lower monthly payment on your vehicle. You can use the additional funds towards other monthly expenses, emergency expenses, or just to build a nest egg.
Taking out a new auto loan is a financial decision that should not be made lightly. It Is Important to understand the implications of taking out a new loan and how it can affect your credit score. Getting a quote that does not impact your credit score is the lowest-risk way to see if refinancing can offer significant savings. To get a free quote with RateWorks today, visit us here.
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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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When Is It A Bad Idea To Refinance A Car Loan
An auto loan refinance can be a smart way to save money, but there are several circumstances in which it may not make sense:
- If interest rates have increased since you took out your original car loan, it may be impossible to get a better financing rate, even if your credit scores have also improved in the interim.
- If you’ve paid off the majority of your car loan, the benefits of refinancing may be negligible, as origination fees on the new loan could offset the savings you’d get by refinancing just 12 to 18 months of payments.
- If you purchased your car new or near new and have since logged exceptionally high mileage, or if it’s been damaged in a crash, flood or other mishap that’ll significantly reduce its resale value, you may not be able to get a loan that covers what you owe on the original loan.
Finally, a strategic consideration: If you’re planning to seek a mortgage or other large loan in the next six to 12 months, it’s wise to refrain from applying for any credit, including auto refinancing, that could cause a dip in your credit score. Avoiding new credit applications can help you present your best possible credit score when you submit your mortgage application.
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