If you refinance a car and save money or avoid car payments you cannot afford, the temporary damage to your credit score is a small price to pay. That can be rectified with the right decisions in good time.
Your credit can only suffer when you refinance car loan when:
- Your existing car loan is refinanced by taking out a new loan.
- The lender will most likely conduct a hard credit inquiry to approve the loan.
- You will experience an increase in average account age and credit utilization as a result of the new loan.
How do you refinance a car?
You can refinance your mortgage if you want to pay off the remaining balance on your existing loan, lowering your monthly payments or lowering your interest rate. When you initially financed your home, you applied to a few lenders and compared their interest rates and fees.
Upon acceptance of the loan offer, the refinancing lender pays the original lender the remaining balance of your loan. The new lender will seize the car if they cannot make payments. To pay off the new loan, you will need to pay the refinance lender every month.
If you refinance a loan, it will affect your credit score in three ways. They are:
The credit report was hard-checked. Choosing the best-refinancing terms depends on your creditworthiness. Several lenders can drop your credit score by five points after a hard credit inquiry, and it stays on your credit report for two years.
Multiple loan applications. When you apply for a refinance with a new lender, a hard credit inquiry will be placed on your credit report, and your credit score may be affected. Applying to all the lenders within a short timeline – preferably within a 14–45-day timeframe – is a way around this.
Closed account. As the original loan account is closed, your credit report reflects the refinancing effect. When you consider refinancing an account, consider its size and age.
You will be able to see how many payments you have made toward it in your credit report if you choose the ‘refinance car‘ option. Your credit report will still show that your original car loan was closed without any late payments up to ten years after the original loan was closed. It is best to seek a financial counselor or advisor who can explain the available options to service a car loan. That way, you will get information from a neutral position and have a clear head to choose. It is better to listen to a financial advisor than those whose motive is to sell their multiple services.