Can Refinancing Your Car Loan Hurt Your Credit?

There are a lot reasons people refinance their auto loans. For some, they purchased when they still had bad credit and now have an improved score so they want to refinance at a better rate. Others need a lower monthly payment. No matter what the reason you have for wanting to refinance, it’s essential to understand any effects it may have on your credit.

What are the Potential Impacts on Your Credit Score

There aren’t too many impacts if you choose to refinance your car loan, but the most obvious is the hard credit inquiries.  While overall, it’s a fairly short-term impact, it can be greater if you have a short credit profile. That means you don’t have a lot of accounts or a lot of history. So be aware of how many hard credit inquiries you pile up.

Another potential impact is paying the new loan. If you refinance, you need to make sure to keep paying on time, every month. If you miss even one payment, or are late, the impact is more long-term. You’ll have to work much harder to make it up. So be prepared to pay the new loan just like you would any other loan.

Possible Complications to Avoid

One complication to be aware of when refinancing is not missing a car payment. If you are changing creditors, you’ll want to make sure the amount is paid off in full, and that it’s done in time to make your monthly payment. In other words, check for a delay in funding. As long as you are aware of that potential, you can make sure any payment due is not missed during the refinance period.

Another thing you’ll want to keep in mind is that your refinance fits within your budget. Before signing, check to make sure payments are something feasible, and that it is well within what you can afford each month. If at anytime during your loan you know you’ll be short, call and talk to your creditor. Simply avoiding or missing the payment can have a much bigger consequence, and many creditors are willing to work with you.

The last two things to think about are incurring prepayment penalties (check your loan terms), and going into an upside-down loan, which means the car is worth less than what the loan is for. If those are risks, it’s probably best to hold off on refinancing.

Looking for Refinancing

Most people don’t go out and buy the first car they look at, which is why it’s probably not the best idea to take the first refinance option without shopping around a little bit. Many lenders have varying ways of offering rates, and different formulas they can work with. While you don’t need to get an excess of comparisons, it’s helpful to get more than one. You can even work with websites that do soft credit checks (which won’t affect your score), and that send you multiple offers.

Benefits of Refinancing

Some of the potential benefits of refinancing include:

• Lowering your interest rate – Maybe rates have changed a lot, or maybe your score has gone up and you originally had a bad credit auto loan. Whatever the reason, it can be worthwhile to refinance if you are able to lower your rate.
• Lower monthly payments – Has something in your life changed? Perhaps there has been a reduction in income or a health issue. Maybe you have a new baby and the expenses that come with him or her. Refinancing can reduce your monthly payments, which may make your budget more doable.
• Get more flexible loan terms – Sometimes people are limited when they first get a loan, but things change later. If your income or credit score have gone up, look into refinancing. Especially if it allows you more flexibility in your loan terms.
• Save money over the life of the loan – If you get a lower interest rate, it may help you save money over the life of the loan. That in itself can be an excellent reason to refinance.

Refinancing isn’t for everyone. That’s why you need to do some homework before you take the plunge. However, if it is the right scenario for you, take the correct steps to make sure you are getting the best deal.