Whether or not refinancing a car will hurt credit will depend mostly on your actions—making on-time payments can help your credit, while missed or late payments can hurt it.
It’s not unusual for a loan to become unmanageable. Tons of factors can change our financial situation, and refinancing expenses like your car loan could be a smart money move. But does refinancing a car hurt your credit?
It’s critical to understand where your credit comes from and how refinancing a car loan can affect the impact it has on your finances. If you’re behind on car payments and considering refinancing your auto loan, read on!
Your Credit Report
If you own a car, you already know that your credit plays a big part in your auto loan and its terms. But, many people aren’t clear about where their credit report comes from. Based on a TransUnion study via a Google Consumer Survey, approximately 32.7% of the Americans polled revealed that they had never examined their credit report or credit score.1
Credit reports are a financial profile that details a consumer’s relationship with creditors. They hold records about every credit account or loan agreement that’s ever been under your name.
Credit bureaus issue credit reports. The major credit bureaus are data collection agencies that analyze consumer spending. The three major bureaus reporting on Americans are TransUnion, Experian, and Equifax. These companies practice credit reporting by evaluating the following five factors:
Payment History
Payment history is the record of all of your late payments to your creditors. In most cases, creditors report an account that is 60 days past due to the bureaus.
Payment history is the most crucial factor in your credit score. Being able to pay your debt back on time is very important to potential lenders, so a strong payment history can get you approved for a loan even if your overall credit score is low. The power of a solid history of on-time payments is so vital to your financial health.
Credit Utilization
Your credit utilization ratio is the measurement of how much of your available credit you’re using. For example, if you have a balance of $250 on a credit card with a $1,000 limit, your credit utilization would be 25%. Most financial experts suggest keeping your utilization at or below 30% to maintain a good credit score.
Credit utilization is essential because it shows lenders how you spend across a billing cycle. If you tend to use credit and pay it off at the end of each month, you will be more attractive than someone with a high utilization
Credit History
Credit history tells your potential creditors how long you have been managing credit. Long credit history can signal that you have been managing credit well over time and are likely to continue the pattern.
Consider your credit age as you pay off debt on your credit accounts. Let’s say that your oldest piece of debt is a credit card with a $1,000 balance. After you pay that credit card off, don’t close it. If you do, your credit age will be shortened to the next active account on your credit report.
New Credit
When you rent a house, apply for a credit card, or seek financing for a big purchase (like auto loans), your potential lender or creditor checks your credit report. Those checks are known as hard inquiries into your credit.
When a potential lender or creditor sees several hard inquiries from multiple loan applications on your credit report (mainly if they occur very close to one another), they may interpret the activity as a sign that you are in financial trouble. So, when you are planning on a big purchase or considering a loan, it’s best to not apply for any other loans or credit cards immediately before.
Credit Mix
Credit mix refers to the variety of accounts that you have. For example, having a credit card and an auto loan is a good credit mix because they have different loan agreements and monthly payments. If your accounts are in good standing, a good credit mix will show that you can manage credit well and are likely to handle another account the same way.
Your credit mix weighs the least on your credit. So if you don’t have a wide variety of credit types, don’t sweat it!
Credit Score
The bureaus use all the data above to calculate your credit score. Your credit score is a numerical summary of information in your credit report. Credit scores give creditors an idea of your creditworthiness at a glance.
Most credit scoring models such as the FICO score, use a credit score algorithm to measure credit scores on a scale of 300-850:
| Credit Score Range | Credit Score Category |
| 300-579 | Poor Credit Score |
| 580-669 | Fair Credit Score |
| 670-739 | Good Credit Score |
| 740-799 | Very Good Credit Score |
| 800-850 | Excellent Credit Score |
While options like payday or title loans are available for people with bad credit scores, they will typically come with high-interest rates and need to be repaid quickly. On the other hand, good credit scores can get approved for financing, with a low interest rate and lower monthly payment.
If you’re currently struggling with a low credit score, there are safe options for getting the quick cash you need.
Auto Loans
An auto loan or car loan is exactly what it sounds like—a loan that finances the purchase of a car. When approved for an auto loan, the lender will finance (pay) for the car. Borrowers are usually able to choose loans with terms of 24 to 72 months, meaning you’ll have to repay the loan within 2-6 years. A short-term loan will come with a high monthly payment, and a long-term loan will probably mean paying more interest over time.
Pros and Cons of a Having a Car Loan
A car loan is a piece of debt that you will have to carry for a while. And just like any other loan, car loans have their advantages and disadvantages.
Easily, the most significant benefit of one of these loans is the power it gives you to purchase a car without paying for it all at once. Mass transportation isn’t readily available everywhere, and millions of people rely on their cars every day to get themselves and their families where they need to be.
The biggest hassle with a car loan is the interest. You may not realize it when rolled into your monthly payments, but that interest can add up to a lot of money. A car loan is usually approved with a variable interest rate that can increase during the life of the loan. That increase will, in turn, raise your monthly loan payments. Should those monthly payments start to come late (or not at all), your lender will tack on late fees and penalties.
Auto loans are secured loans that use the car as collateral. If you fail to make regular monthly payments, you may default on the car loan and negatively affect your credit score. In that case, your lender will repossess the car to resell it and recoup the loss of lending you the money. Many people look to avoid repossession—and save money—with auto refinance.
When Should I Consider Auto Loan Refinancing With My Existing Loan?
If you’re thinking about refinancing your current auto loan, you should consider the following:
The Savings
Do you need to save right now? Auto refinancing can unlock lower interest rates that will give you lower payments and financial relief right now.
You’re Behind on Payments
Not being able to make payments can hurt your finances and lower your credit score. A new loan will help you protect your credit so that it will be intact when you need it for other purchases
The Original Auto Loan Lender
If you got your current loan from the auto dealer, there’s a chance that you are paying a higher interest rate than you need to. Interest rates change over time, and you may be able to find a new loan through refinancing that is better than your original loan. Auto refinancing can provide new options at competitive rates.
What Is Auto Loan Refinancing?
When you refinance your car loan, you are replacing your existing loan with a new loan. Like debt consolidation, the new personal loan pays off the original loan. You then make monthly payments on the new loan.
How Does Auto Refinance Work?
When you refinance your car loan, you are taking on new terms that are more manageable than your current loan. Applying for auto refinancing is just like applying for a new loan, which means that you will apply just like you did for your first car loan. Having an excellent credit score will be your best bet when looking into auto refinancing. If necessary, consider installment loans such as a personal loan. Personal loans can be secured or unsecured loans that can help you build credit. Learn more about personal loans vs. car loans.
Auto Loan Refinance: The Pros
Lower interest rates are the best reason to consider an auto refinance. With a lower interest rate, you save money on your monthly payment. If your credit score or interest rates have improved since the start of your original loan, you may qualify for an auto refinance with a lower interest rate. When you save money on your payments, you can reallocate the difference to other parts of your budget.
Auto Loan Refinance: The Cons
Auto refinance offers lower interest rates and lower payments by allowing borrowers more time to repay the loan. However, more payments mean more interest, resulting in paying more for the new loan than the original loan.
FAQS
A hard credit inquiry occurs when a lender checks your credit for lending purposes, such as when you apply for refinancing a car. This can temporarily lower your credit score. In contrast, a soft inquiry, which happens when you check your own credit or when a lender pre-approves you without your initiation, doesn’t affect your score.
Yes, you can refinance your existing car loan multiple times. Each time, it’s essential to evaluate the potential savings, credit impacts, and financing terms to ensure it’s beneficial.
While there’s no strict time frame, many lenders prefer that you wait at least a few months to a year after opening new credit accounts or securing an original car loan before considering refinancing. This allows you to establish a payment history.
Yes, some lenders might have restrictions or different terms for refinancing older vehicles or specific car types. Always check with potential lenders about their criteria.
Typically, if you wish to remove a co-signer through refinancing, you’ll need to qualify for the new loan based on your own credit and financial situation. If you want to keep the co-signer, they will likely need to be part of the refinancing process.
Extending the loan term can reduce your monthly payments but might result in more interest paid over the life of the loan. Origination fees, which are one-time charges by lenders to process a new loan, can also affect the overall cost. A shorter loan term might increase monthly payments but decrease the total interest paid, even when considering origination fees.
Refinancing can offer lower interest rates or better loan terms than your original loan, especially if market conditions have improved or if your original loan had a particularly high rate. Even without a significant change in your credit score, refinancing might still provide savings over the life of the loan.
Conclusion With CreditNinja: Car Loan Refinancing, Does it Hurt Credit?
So, does refinancing a car hurt your credit? CreditNinja wants to emphasize that ultimately, the answer is up to you. While refinancing plays a role in determining your credit score, its negative or positive impact depends on you. Your score may take a dip due to hard inquiries, but the strength of your overall credit health can help it rebound. If you get approved for refinancing with better loan terms and rates, maintaining good financial habits and repaying your debt on time will keep your credit score strong and your financial options plentiful.
References:
- Credit Study | Transunion
- Does Refinancing Your Car Loan Hurt Your Credit Score? | Cusocal.org
- How Refinancing Affects Your Credit | Experian
