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What Happens to My Old Loan When I Refinance?

Finance | 09/29/2022 22:00

When you refinance a car loan, you can save a lot of money on your car payments. But how exactly does it work, and what happens to your old car loan when you refinance?

Let’s talk about what happens to your old car loan when you refinance (and how refinancing can save you a lot of money!)

What is car loan refinancing?

When you refinance a car loan you are replacing your existing loan with a new loan, a loan that ideally has better terms and a better car loan APR. The new loan that you take out will directly pay off your old loan. Your old loan is replaced by your new loan so you only have one loan to pay off.

Does refinancing a car hurt your credit?

Your credit score is used by lenders to determine how fiscally responsible you are (and ultimately how likely you are to repay a loan). Your credit score takes five major categories into account:

  1. Your payment history. This is the most important category of your credit score and accounts for 35% of your score. This measures if you pay your bills in full and on time. 

  2. Your amounts owed. This accounts for 30% of your credit score. This looks at how much money you owe compared to how much credit you have available to you. 

  3. Your credit history length. This accounts for 15% of your credit score and looks at the age of your accounts. A longer credit history with longstanding accounts makes you more favorable to lenders. 

  4. Your credit mix. This accounts for 10% of your credit score and looks at how healthy your credit mix is. A diverse portfolio with a mix of loans (like mortgage, student loans, and credit cards) shows that you can balance your money over several accounts.

  5. Your new credit. This accounts for 10% of your credit score and looks at any new accounts you may have opened and how many inquiries you have on your account. Since the accounts haven’t been around very long, your ability to manage them has not been proven.

When you refinance your car loan, two of your credit score categories will be affected: your credit history length and your new credit. Having a new account will shorten your credit history length and show a new account on your report, both of which will cause a dip in your score.

But this dip will not last very long–most likely it will affect your score for about a year. And this will pale in comparison to the benefits for refinancing. Refinancing your car loan to make your car loan payments more manageable will actually help your credit score in the long run. 

When you are in the process of refinancing, every application you send will trigger a hard inquiry on your credit report. Having a lot of hard inquiries on your credit report may cause even more of a decrease in your credit score. That’s why it’s important to send out all of your applications in a short timeframe. Credit bureaus will give you a fourteen day window to shop around. This means that if you send out all of your applications in that fourteen day time period it will only trigger one hard inquiry on your credit report.

When should you refinance a car?

Refinancing your car loan has a lot of benefits. It can help you lower your monthly payments, lower your interest rate, and even allow you to add or remove a cosigner from your car loan. If any of the following apply to you, it’s time to consider car loan refinancing.

Your credit score has increased

If your credit score has increased since you initially financed your car, there’s a good chance you will qualify for a lower car loan APR. The car loan APR you are offered will depend on:

  • Your credit score

  • Your debt-to-income ratio

  • The balance of your loan

  • The market rates

Your credit score is the most important factor in this, so if your score has increased in the months or years since you originally financed, there’s a good chance you can find a lower APR. 

There are a few reasons why your credit score may have increased since original financing:

  • You paid down some of your debts

  • Your lines of credit increased

  • You made consistent, full, and on time payments

  • You had a negative event expire

  • You disputed errors on your credit report

We recommend consistently checking your credit report and credit score to monitor changes. And if your score has increased, you might want to think about refinancing your car loan.

The market rates have decreased.

If the market rates have decreased since your initial financing, there’s a good chance you can secure a lower car loan APR. The APR that you are offered is based on your finances as well as the market rates, so a decrease in market rates can mark a big decrease in your car loan APR.

You could use some breathing room.

When you refinance your car loan you can adjust your repayment period. You can shorten your repayment period, which will allow you to pay off your loan faster and save you money overall, although it will make your monthly payments a bit higher. You can also choose to lengthen your repayment period. By lengthening it you are spreading out your payments over a longer period of time. This means that while you will be paying interest for a longer period of time (and therefore spending more money over the course of the loan) you will significantly decrease your monthly payments. 

You want to add or remove a cosigner.

You may want to add a cosigner onto your loan. Adding a cosigner with a good credit score can help you secure a lower car loan APR. Adding a cosigner on who doesn’t have any credit, such as your child, can help them to build credit. Either way, adding a cosigner is only possible through refinancing. 

Conversely, you may wish to remove a cosigner from your loan. Again, the only way to adjust and remove a cosigner is to refinance your car loan.

That’s what happens to your old loan when you refinance–and why you should think about car loan refinancing.

If car loan refinancing seems like a good idea, then don’t wait any longer! Our experts are ready to help you start saving money. And with a 96% would-recommend rating on TrustPilot, you know you are in good hands! So get your free quote today!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.