Refinancing a car will likely cause a short-term dip in your credit score, but the money you save with a better interest rate may be worth the small ding to your credit.
On the other hand, refinancing can also save your credit score from disaster if you can’t afford your current monthly payments — so long as you can get a longer loan term with lower payments.
Yes, refinancing your auto loan will usually hurt your credit a little. But if you make your new loan payments on time, any damage to your score will likely be both temporary and small.
Your credit could bounce back to its current score in as little as a few months.
How much will my credit score decrease?
Your credit score takes a hit in a car loan refinance twice: once when the lender pulls your credit report, and again when you take on the new loan.
When the lender does a hard credit pull to check your credit report before offering you a loan, your FICO score could drop by up to five points.
Then, after you close on your new loan, you’ll see an additional small dip because you’ll have new credit, decreasing the average age of your accounts.
How long will a car refinance affect my credit score?
Refinancing your auto loan could only affect your credit for a few months, but the hard credit pull can stay on your report for up to two years.
Here are the factors that determine how long your credit score will take a hit:
- Your current credit score: If you have bad credit, you could see the effects of a refinance on your credit for as long as a year.
- Applying for different types of credit: Submitting applications for credit cards or other kinds of loans — including personal loans, mortgages or student loans — at the same time that you’re refinancing your car will extend the impact of the hard pull on your credit score.
- Using the rate-shopping window. To minimize damage to your credit score, submit all of your auto refinancing applications within 14 days of each other. This is the “rate-shopping window,” during which all credit checks will count as just a single inquiry.
The most important factors that determine your credit score are your payment history and how much debt you have compared to how much you can borrow.
To improve your credit score after refinancing, focus on making your payments on time and look into improving your credit utilization rate.
How does refinancing a car work?
When you refinance, you’re replacing your current car loan with a new loan to get better interest rates or lower monthly payments.
The steps for how to refinance a car loan are almost the same as applying for a car loan in the first place.
Apply for loans
When you’re refinancing your car, apply with several car refinancing lenders to make sure you’re getting the lowest interest rates and best terms possible. Submitting all of your applications within 14 days will minimize any damage to your credit.
Compare rates and terms
Once you have a few offers in hand, use an auto refinance calculator to help find which of the loans will save you the most in interest or offer the lowest monthly payments. This can help you decide whether refinancing is worth it for your situation.
Close on loan
If you decide that a refinance is a good idea, you’ll close on your loan once you accept the terms and conditions and sign the loan paperwork.
View Personalized Offers
If you can save money with lower interest rates, or if you can avoid missing payments by making your loan more affordable, then refinancing your existing loan is definitely worth considering.
You could get better interest rates if your credit score has improved since getting your original loan, if car loan rates have taken a dive or if you can add a cosigner with strong credit to your new loan.
Unless you’re planning big money moves that require you to protect your credit at all costs — like taking out your first mortgage — the small hit to your credit probably isn’t worth worrying about.
When to avoid refinancing your car loan
The impact on your credit score may not move the needle on your decision to refinance, but there are other times you may want to avoid refinancing your car. A good example is if you owe more than your car is worth.
Pros and cons of refinancing a car
| Pros | Cons |
|---|---|
May qualify for lower interest rates Potential for more affordable monthly payments Can use cash-out auto refinance to get a lump sum | Small dip in credit score You’ll pay more money in interest if you lower your payments by extending your loan term You may have prepayment penalties on your current loan |
The right time to refinance a car is when doing so would help you. Refinancing may be a good idea when your credit score has gone up, when you want a different term, when you want a smaller payment or when interest rates have fallen. You can read more about when to refinance your car and when to wait.
Credit scoring models place emphasis on your credit utilization, which is the amount of money you owe on revolving accounts compared with your total amount of available credit. If you can afford to reduce the balances on your credit cards, do so and reapply after you reach a credit utilization of 30% or less, which is ideal according to VantageScore and Experian. This can help to boost your score and improve your credit utilization score.
First, determine whether car refinancing will help you, then collect your documents and apply to a few lenders. Compare the offers you receive and accept the best one. Here’s a full guide on how to refinance your auto loan.
You may be able to get a cash-out refinance on your car, but there are pros and cons to consider before doing so. Often, taking a cash-out auto refinance loan will mean a longer loan term, which will increase your total cost of borrowing.
