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Will Refinancing My Car Loan Hurt My Credit?

Finance | 03/18/2022 23:00

Refinancing your car loan can be a great idea for a lot of reasons. If you are like most people, you are probably overpaying significantly on your car payments every month. Maybe you got talked into a bad deal, or maybe market interest rates were higher when you originally financed your car loan. But no matter what the reason, your best solution is most likely to refinance. Car loan refinancing has a lot of benefits, but you may be wondering “does refinancing a car hurt your credit?” 

Refinancing your car loan will cause your credit score to take a temporary dip, but it’s unlikely to hurt your credit score in the long run. In fact, refinancing your car will probably increase your credit score over time.

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.

Credit scores are three digit numbers that tell lenders how likely a person is to repay their debts. The scores range from 350-850 and are calculated by taking into account the following factors on a person’s credit report.

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 

Your credit mix accounts for 10% of your credit score. You will need a good mix of retail accounts such as credit cards, loans, and mortgages for a good score. This shows lenders that you can balance your payments between multiple accounts.

Factor #5: New Credit

Your new credit accounts for 10% of your credit score. If you open a bunch of new accounts, you will be flagged for a lower score. This indicates to lenders that you have new debts that may change your ability to repay.

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. Don’t 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 a car loan. Refinancing your loan 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 refinance your car and change your repayment period, you can also significantly reduce your monthly payments and give yourself more breathing room every month. This will also help improve your ability to make consistent on time payments.

If you do not have a good mix of credit, adding in a car loan can be beneficial to your credit mix as well.

When Is It a Good Idea To Apply For A Car Refinance?

It is a good idea to apply for a car refinance if any of the following apply to you:

Your credit score has improved

If your credit score has improved since your initial financing, there’s a good chance you will qualify for a much lower car loan APR. 

Market rates have decreased

If the market rates have decreased in general (which they have, significantly, in the last two years), you may be eligible for a lower car loan APR, even if your credit score hasn’t changed.

You were talked into a bad deal initially, or agreed to dealer financing

You may have gotten into a bad deal in the first place and agreed to a high car loan APR. This is especially common with dealer financing. But if you pursue car refinance, you can change these terms.

You need to add or remove a cosigner

If you would like to either add or remove a cosigner from your car loan, you will need to refinance your car loan. Lenders will not simply add or remove someone from the loan, as each offer is tailored specifically to each applicant. Removing one person or adding another person could greatly change the prospect of repayment in their eyes.

You need extra cash every month

 If you need extra cash every month, refinancing your car loan can help you out. Even if you don’t qualify for a lower car loan APR, you can change your repayment plan. By changing your repayment plan, you are adjusting the amount of time that you have to pay the money back. When you extend the repayment period, your monthly payments will automatically decrease.

But the time is not right to refinance if…

There are a few times when it will not be worth it for you to refinance your car loan. 

  • You have less than one year left on your existing loan. You will most likely not qualify for car loan refinancing. 

  • You just financed (or refinanced your car). Experts suggest waiting at least six months to let your credit score bounce back.

  • You owe more on your car than the car is worth. If this is your situation, your loan is considered underwater and will not likely qualify for refinancing. 

  • Your car has over 100,000 miles. Lenders have certain restrictions for the cars that they refinance, and if the car is too old or has too many miles, they will not want to refinance your car loan.

Which Car Refinance Companies Are Legit?

If the time seems right for you to refinance your car loan, you are probably wondering which car refinance companies are right for you. While you can reach out to lenders directly and handle all of your applications by yourself, it is much easier to use a company that specializes in auto refinance, like Auto Approve. Using Auto Approve to refinance your car loan can help you in a number of ways:

  1. They have existing relationships with lenders to get you the best offers possible.

  2. Auto Approve never marks up their rates; they pass the savings right on to you.

  3. All you have to do is fill out some information and Auto Approve handles all the rest.

  4. You can have offers in minutes.

  5. Auto Approve has a high customer satisfaction rating, so you know you’re in good hands.

  6. Auto Approve even handles the DMV paperwork.

Not all car refinance companies are as reliable or as effective as Auto Approve. That’s why we have a 96% would-recommend rating on LendingTree, as well as an A+ rating from the Better Business Bureau. Refinancing your car loan couldn’t be easier with Auto Approve.

Refinancing your car loan may cause a temporary decrease in your credit score, but it can save you money (and ultimately may increase your credit score) in the long run.

So if the time is right for you to refinance, don’t wait any longer! Start saving today with Auto Approve!


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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.