Many people are considering refinancing as an option to get rid of their existing loan much faster. When refinancing a car loan, it can be an excellent way to save some cash as long as there’s a lower interest rate, but it can also help decrease the monthly payment.
However, does refinancing a car hurt your credit? It is a question that many people ask themselves before refinancing a loan, and it can quickly turn away potential borrowers. What’s the truth?
Refinancing and Your Credit Score
When you’re applying for a loan refinance, you are shopping around for a new lender. Ideally, you want a lender who’s able to give you an outstanding offer, better than the one you currently have. But it’s essential to see how you can potentially lead to the downfall of your own credit score while you’re at it.
Basically, a business is going to conduct an inquiry. Simply put, an inquiry is an act of checking your credit. Inquiries can be of two types, respectively, a hard inquiry and a soft inquiry.
Also Read: Is It Time to Refinance Your Business Debt?
The first one takes place when you, as a borrower, sign up to get a loan or credit from a lender and wait for the approval. What happens during this part is simple: the lender is looking your credit up and decides whether you’re worth accepting or not. But the bad news is that this can decrease your credit rating about 3-5 points. It may not seem like much, but it’s still enough to be bad for you in the future potentially.
But that doesn’t mean there aren’t exceptions to this. Let’s say that you’re rate shopping for auto loans, student loans, and mortgages. Multiple inquiries are going to be performed for 45 days, but luckily, they will only count as one. Once you step outside that period, your credit will get a beating.
Despite hard inquiries being detrimental for your credit rating, soft inquiries are the total opposite, having no negative impact as you shop for interest rates.
Conversely, your credit score could also take a hit if you have too many new accounts. When you refinance, 10% will be taken from your score. It also considers how many accounts you have opened during the recent period. It shouldn’t be a surprise that opening too many accounts in a short amount of time is detrimental for your rating. You should only stick to refinancing and no other credit lines.
Not to mention that a car loan refinance will actually reduce the age of your accounts given you’ll get your current car loan replaced by a new one.
Can You Decrease the Harsh Impact Refinancing Has on Your Credit?
Now that we’ve established how refinancing a car loan hurts your credit score, it’s essential to ask: are there ways to minimize the blow? Fortunately for you and the significant number of people who want to refinance their car loan, it is possible to lower the harshness of the effect. First of all, you must know that while your credit score gets affected, the result generally lasts up to 2-3 months, after which it starts to diminish. Over time, it will get better if you make your payments on time and ensure you don’t do anything that will further affect the rating. After 24 months, hard inquiries usually drop off your credit, so that’s good news.
If you want to make sure you stop suffering due to the effects of refinancing, you must start making plans early on. What does this mean? As mentioned earlier, if hard inquiries are made within 45 days, they will only count as one and have a less negative impact. They are only getting worse if you go past that period. So, make sure to do it early enough to protect your credit score as much as you can.
This is not all there is to it, though. Here are some tips to help you decrease the effect of refinancing on your credit rating.
- Don’t Make Too Many Loan Applications
Ideally, you should refrain from applying for too many loans while you’re also trying to refinance your car loan. What would you think if you were a lender, and noticed an applicant filling loan applications everywhere? Doesn’t that look desperate? It’s how you’ll be viewed if you do the same. Thus, it will significantly lower your chances of refinancing. Make sure you don’t run after money everywhere for the time being.
- Make a Credit Report Check
Sometimes, mistakes are made, and the same goes for your credit report. Maybe you’re being accused of something you haven’t done, or there’s some wrong information that could affect your refinancing application. For this reason, you need to check your credit report before you consider filling out a car refinancing application, to see whether there are things that should be fixed or not. Don’t worry, checking your credit rating doesn’t influence it negatively.
- Do Your Homework
Going for the first offer you find can often end badly. Many auto loans seem convenient at first, but how do you know there aren’t better offers already? Use your time to conduct some research and compare auto loans between them. Not only that you will have a wide variety to choose from, but you can also check some reviews and see what experience other clients have had with the specific lender. By doing this, you will see what benefits you are going to have in the event you are granted the new loan.
Does refinancing an auto loan hurt your credit? The answer is: yes, it does. But you should understand that it’s normal to have a slight decrease in your credit score when you’re doing this. At the same time, you should accept that it will go away in time. More importantly, you can lower the effect of the application on your rating by taking the right steps. Apply what you’ve learned in this article, and your car refinancing shouldn’t be a burden.