Will refinancing your auto loan hurt your credit score?
Yes, refinancing an auto loan may hurt your credit score. When you refinance a vehicle, you’re applying for a new auto loan, then using that loan to pay down your existing car loan. During the application process, the lender will check your credit reports, resulting in a hard credit pull.[1]
Some lenders, like LendingClub, offer pre-qualification to check your rates first, which shows up as a soft pull rather than a hard pull on your credit report.
How much will your credit score decrease if you refinance?
Your credit score may decrease after a hard credit check when you refinance an auto loan. However, it could go down even more if you’re applying for additional credit over a short time.[1] If you’re applying for auto refinance loans, you may want to reconsider whether applying for additional credit like a credit card or mortgage makes sense.
When you refinance your auto loan, the age of your accounts—or the length of your credit history—goes down. Fortunately, this credit scoring factor only makes up 15% of your score so your score may be impacted accordingly. Loans that are reported as “new” to the credit bureaus also signal that you’ve taken on more debt, which could lower your score.[2]
Your credit mix, or the different types of accounts on your credit report, may not change much since you’re replacing one auto loan with another.[2]
How long will it take for my credit score to recover?
According to Experian, hard inquiries from the application process can stay on your credit report for up to two years, but generally the impact on your score only lasts about a year.[3]
When refinancing your car loan might make sense
Refinancing your auto loan can offer many benefits, like lower interest rates or a longer loan term. However the timing may not always be right, depending on your financial situation and other factors. Here’s a closer look at when refinancing your car loan might make sense.
1. You got the loan from the dealership
If you got your original loan from the car dealer, you may not have received the best rate possible. A dealership is typically an intermediary between the buyer and the auto lender, and the dealer may mark up the interest rate to compensate for their involvement.[4] You may be able to get a better rate by refinancing directly with an online lender, credit union, or other financial institution.
2. Your credit has improved
If your credit score has increased since you first took out the loan, and you’ve been making on-time payments on your original loan for at least a few months, you may qualify for a lower interest rate through refinancing.[5]
3. Interest rates have gone down
Interest rates fluctuate often. If interest rates have decreased since you first took out your loan, you may be able to take advantage of lower rates. Rate shopping without a hard credit check can help you determine whether you qualify for a lower rate. Credit scoring systems such as the FICO® and VantageScore® have built-in accommodations for rate shopping on installment loans. They treat inquiries related to multiple loan applications as a single event, as long as all applications are for the same loan amount and are submitted within a 14-day window.[6]
4. You need a lower car payment
Even if you’re unable to lower your interest rate, refinancing can still help you get a lower monthly payment. You’ll refinance a lower balance than what you started with, which shrinks your monthly payments. Refinancing into a longer term may also lower your monthly payments because they’re spread over more months. This can free up cash for other monthly expenses. Just keep in mind that this strategy can result in a higher total interest cost over the life of the loan.