Does Refinancing a Car Loan Affect Your Credit Score?

May 1, 2024

Refinancing your car loan can help you get a better interest rate or change your loan term. However, it might temporarily lower your credit score. But don't worry, it usually bounces back after a few months of making on-time payments.


How does refinancing affect your credit score? 


Your credit score plays a big role in getting approved for auto loan refinancing. 

When you apply for refinancing, it usually involves a hard credit check, which can temporarily lower your score by a few points. But don't worry, it'll bounce back if you keep making your payments on time.

If you already have a good credit score and history, the impact on your credit will be minimal. In fact, if you stay consistent with your payments, your score could even improve in the months after refinancing.


How to reduce the impact on your credit score?


1. Compare interest rates within the same time frame

Compare interest rates from different lenders to find the best deal. When refinancing your auto loan, the goal is to get a lower rate and save on monthly payments. Credit bureaus group similar inquiries together, so check rates within a short time frame, like a week or two, to minimize the impact on your credit score.


2. Get pre-qualified before starting your research

Research auto refinance loans using pre-qualification. Some lenders offer this with a soft credit check, which won't impact your credit score. It's a helpful way to see if you might qualify and get rate estimates without committing to a full application, which involves a hard credit check. Keep in mind, pre-qualification doesn't guarantee approval, and rates may change later on.


3. Don't apply for other loans while refinancing

Multiple hard credit checks can hurt your credit score. Plan your auto refinance when you don't need other loans, like a mortgage, to minimize the impact on your credit.


Is it possible to refinance a car with bad credit?


While it's possible, it might not be the best idea. Typically, you need good credit for a better interest rate. With bad credit, finding a lower rate can be tough.

Still, you can check out refinancing options, even with bad credit. Get pre-approved from a few lenders to see what rates you qualify for. If you find a lower rate, refinancing could be worth it.

Another option is using a co-signer. This is someone with good credit who signs the loan with you. It might help you get a better rate. But if your co-signer also has bad credit, it might not make a difference.

In conclusion, refinancing your car loan can be a smart move. It can give you lower interest rates, more payment options, and save you money each month. But before you decide, think about these things carefully. Make sure it's the right choice for your finances.