Understand The Short- And Long-Term Effects of Auto Refinance.
If you have determined that refinancing your auto loan is the right move at the right time, it is wise to understand the impact an auto loan refinance will have on your credit report. In the short term, the hard credit inquiries registered by new finance sources will lower your score by a few points. In the long term, all that really matters is whether you repay the new loan on time.
Let’s take a closer look at the factors behind your credit score and how they are affected by an auto loan refinance.
Dawn of a New Deal
Depending on the scoring model, each hard inquiry will reduce your credit score by three to five points. There are two ways to reduce your search for a new auto loan to a single hard credit inquiry:
- Shop before you buy. Before you submit credit applications to multiple sources, do as much research as possible. If you can determine which finance company, bank or credit union has the best offer you qualify for, you might be able to limit yourself to a single application.
- Go on a rate-shopping spree. Determine which finance sources you wish to apply to, then submit all the applications at once. Most scoring models will group hard inquiries for the same type of credit into a single hard inquiry, particularly when they all show up in the same 14- to 45-day period.
Hard inquiries typically remain on your credit report for two years. Their impact on your score will lessen after two or three months. Most models stop counting hard inquiries against your score after a year, even if they still appear on your report.
Once you have been approved, your new finance partner will buy out your old loan and report the new one. This could cause the average age of your accounts to decrease. That will have a negative effect on your score, particularly among models that don’t include closed accounts in their payment history calculations. To minimize the impact, consider keeping those old, unused credit card and store card accounts open a bit longer.
The Months and Years Ahead
No matter the model, your payment history counts for at least one-third of your credit score. Missing a single payment can cause a major dent.
If your new creditor tells you the new loan will cover the current month’s payment on the old loan, take heed: If there is a delay in funding, that payment could be missed, and you may not be aware of it until it is already past due. Confirm the new loan will pay off the old loan in time or make the payment and expect a refund.
Go into the new loan with a budget that will allow you to make every single payment on time. If, for any reason, you can’t make a payment one month, call your creditor and ask for an extension. By avoiding late or missed payments, you will quickly undo whatever short-term damage your credit score suffered in the course of the refinancing process.
Finally, despite all the blessings a refinance can bring, don’t try to do too much at once. If you are also considering refinancing your home loan, you might be better off waiting until your credit score recovers or improves as a result of your auto loan refinance. If you don’t know which to do first, check out our entry on mortgage vs auto loan refinancing.
Is auto refinancing right for you?
Refinancing may help you…
- Lower your monthly payments
- Decrease your interest rate
- Remove someone from your loan
When you apply to refinance through Innovative Funding Services (IFS), your dedicated Finance Advisor will search for a car loan that meets your needs from our network of 25+ national lenders. We offer up to 100% financing for applicants with credit scores of 525-850.