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Does Refinancing My Car Hurt or Help My Credit?

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Can Refinancing My Auto Have a Negative Credit Impact?

Auto refinancing does not always lead to savings. If you are not careful, you could end up paying more than you would have on your original car loan. This is most likely to occur if your new loan stretches your payments over a longer period. For example, perhaps your original loan was due to be paid back over 63 months, while your new loan has an 84-month repayment term.

A longer repayment term can lower your monthly payment, which might fool you into thinking you are paying less for the loan. Because you will be making many more payments under your new loan, however, you will pay more in interest costs over the life of the new loan.

Another example of where a refinancing might not pay off is if your original loan terms state that you will have to pay a prepayment penalty if you pay off the original car loan early. Each lender has its own rules for when it will or will not refinance. For example, you might not be able to refinance if your car is too old or if it has too many miles. Check with a lending specialist to be certain about the loan terms.

Will Refinancing My Auto Loan Improve My Credit?

Keeping your credit score high is the key to getting the best terms on any loan, including an auto loan refinance. You may wonder if refinancing a loan can boost your credit score. The complicated answer is “no” and “yes.”

You May Have A Temporary, Modest Credit Score Dip

When hard inquiries appear on your credit report, your score is likely to fall slightly. In the short term, refinancing your auto loan is more likely to hurt your credit score than to help it, even if the dip is modest and temporary. Experian, Equifax, and TransUnion (the “big three” credit-reporting agencies) agree an auto loan refinance will likely lower your credit score modestly.

Why does your score dip? Because when you shop for a refinance loan, you likely will compare offers from various lenders to make sure you find the best terms with the lowest rate. Each lender you apply with requests a credit check that results in what is known as a “hard inquiry.”

Then, when you finally accept a loan offer, your score will fall a little more. The drop in both cases results from the fact that you are applying for and being granted new credit. As your debt burden rises, so does your statistical likelihood of missing your next payment.

Returning Your Credit to Normal and Beyond

Experian also notes that the reduction in your credit score is a small price to pay for getting a new loan with a lower rate that could save you a lot of money over time. Even better, as long as you make your payments regularly and on time, your credit score should bounce back within a few months. It may even rise since you are handling your new debt responsibly.

One important thing to note: As long as you complete all loan shopping within a few weeks, all the lender inquiries into your credit profile will count as a single “hard inquiry.” Although this will hurt your credit slightly, you do not have to fear that your score will dip every time a lender makes a new inquiry.