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Will Refinancing a Car Hurt Your Credit?

Many people wonder whether refinancing a car loan will hurt their credit score. The short answer is maybe. In this article we discuss the potential impact of refinancing, and ways that you can protect or improve your credit score.
refinance car payment


If you’re considering refinancing your car loan, you might wonder if it will affect your credit score.

The answer is: it depends. Still, there are many reasons why you might want to refinance your auto loan.

Here’s what you need to know about how that process works and whether or not it’s worth the risk for you.

What Is Car Refinancing?

Refinancing a car loan is the process of taking out a new loan to pay off an existing loan.

The new loan will have a lower interest rate than the previous loan, which means that you’ll be paying less each month.

You can save money by refinancing your car or truck as long as you don’t incur additional charges or penalties.

Lenders consider your credit score when determining whether it’s worth refinancing your vehicle.

Your credit score number indicates how likely it is that you’ll pay back money borrowed from others—and higher scores translate into better terms on loans and financial products like mortgages and credit cards.

How Does Refinancing a Car Loan Work?

Refinancing a car loan means you get a new loan for a new car. -This has several benefits:

  • You pay off your old auto loan, which frees up cash in your bank account and improves your credit score.
  • You can get a lower interest rate on the new auto loan, which will help you save money over time.
  • The new or refinance company may offer other perks like discounts on insurance or maintenance costs in exchange for higher monthly payments (but this is not always the case).
Refinancing a Car Loan

How are Credit Scores Calculated?

Credit scores are calculated using a complex formula that weighs different factors in your credit report and creates a score ranging from 300 to 850. The five main factors that go into calculating your score are:

  • Payment history accounts for 35% of your credit score. How well do you pay your bills?
  • Credit utilization makes up 30% of your credit score. -This is how much of the available amount you’ve borrowed (or “utilized”) on an account.

For example, if you have a $1,000 limit on one card and owe $500, then 50% of the limit has been used ($500 / $1000 = 50%).

A lower utilization rate can lead to a better score because it shows lenders that you aren’t wasting money by paying interest on large balances or applying for new cards frequently.

  • The amount owed accounts for 15% of your credit score. Are there balances showing on any lines of credit? If so, ask yourself why; financial experts agree that keeping monthly expenses low is key to building good credit history!

How Do Car Loan Payments Affect Your Credit Score?

Your credit report is a significant part of your financial life, and lenders use it to determine whether or not you qualify for loans, auto financing, and more.

So it’s essential to understand how credit scores work and how they’re calculated so that we can make sure you don’t look back and see that refinancing your auto loan hurt your credit.

One thing that matters most in terms of your credit score is the payments you make on any money you owe — like car loans, student loans, and mortgages.

Those payments are a significant factor in determining your FICO score, which ranges between 300 and 850 points.

How do car loan payments affect your credit score? If you pay late or miss a payment altogether, it can hurt your score significantly by lowering its range from 300-850 points down into the 500s or lower. Paying on time is crucial.

If that weren’t enough, paying more than the minimum monthly payment will help you build a good history of paying on time – which improves your overall standing with lenders because they know that when allowed to borrow money from them again in the future.

They’re more likely to consider giving it based on past performance rather than just considering other factors alone, such as income level/employment status etcetera.

How Refinancing Your Auto Loan Can Lower Your Credit Score

Refinancing your auto loan can lower your monthly payment, but it can also make your credit score drop. It all depends on what you do with the money you save.

Lower Your Payments by Refinancing Your Auto Loan

When you refinance a car loan, you’re changing the terms of your current loan agreement to make it more affordable.

You might be able to get a new car loan with a more extended repayment period and a lower interest rate, which would reduce how much you pay each month. If this happens, then refinancing will have helped improve your credit score.

Is Auto Refinancing Worth It?

How do you know if refinancing a car loan is worth it?

The short answer: It depends. If you can get a better interest rate on your car loan and lower monthly payments, refinancing may be worth it.

However, if the only reason you’re looking to refinance is that you want the new car to smell off of your old vehicle, then maybe not so much.

To help determine whether or not refinancing makes sense for you, some steps can help guide your decision-making process:

  • Check Your Credit Report – Knowing what kind of credit score(s) and rating(s) (or FICO score) you have will give insight into whether or not refinancing is even possible for someone with poor credit history (yes/no).

If refinancing isn’t possible due to low scores or other factors like a high debt-to-income ratio, then there is no need to waste time trying beforehand.

 Instead, look at today’s lowest rates from top lenders in California, for which we’ve already done all the work for us, so now find one that meets your needs and apply online fast.

 How to Reduce Impact on Credit

To reduce the negative impact on your credit score, you can refinance your car loan with a new lender. You can also reduce the effect by paying off your loan early or by paying down the balance of your loan.

If you get another car and want to refinance, make sure that you check with several lenders before deciding on one.

When looking at rates, it’s important to compare apples-to-apples rather than just pricing out one type of rate from each lender — everyone charges different interest rates depending on what kind of customer they think they’re dealing with.

How to Prepare to Refinance Your Car

To ensure you get the best refinancing deal possible, start by getting a copy of your credit report.

Checking that all information is accurate and up to date will help you avoid any surprises when it comes time to apply for your new loan. Next, make sure you have a good payment history.

A solid record of timely payments shows lenders that you are trustworthy and reliable—two things they love! So if possible, try not to miss too many gains throughout this process.

If your credit score is low or uneven due to past mistakes like late payments or unpaid debts, contact each creditor (such as Verizon Wireless or AT&T) about these issues before applying for a refinance loan with them so they can take them into account when calculating your score for approval purposes.”

Review Credit Reports and Fix Errors

Checking your credit reports and fixing errors is an essential step before you apply for a loan.

And it’s an even more critical step if you’re already refinancing your car loan.

Your credit score will take a hit if there are any errors on your report that could potentially be fixed.

The best way to check your credit reports is by requesting them from all three major reporting bureaus: Experian, TransUnion, and Equifax (the latter two are only available online).

You can request one copy at a time—for example, TransUnion first and then Equifax next—to help keep things organized and ensure you aren’t missing anything.

While most lenders require that applicants have a minimum score of 650 before they consider them as customers (a higher score indicates less risk), some lenders may have lower requirements based on their company policy or the type of product offered.

If so, try checking with some smaller banks or credit unions first; they may be able to offer better terms even if your score isn’t relatively as high as others’ might require.

In any case, you should keep an eye on your credit report throughout the entire process.

Shop Different Lenders

If you’re borrowing a significant amount of money, it’s worth shopping around for the best loan.

Make sure you’re getting the best rate possible on your car financing. A personal loan calculator can help you compare different lenders and find the one that offers you the lowest APR.

It would be best if you also considered how much of a difference in interest rates can make to your budget when comparing loans from different lenders.

If one lender offers a better interest rate than another, but its monthly payment is higher than what you would pay at another bank or financial institution, then it may not be worth refinancing just for this reason alone.

However, if both banks are close in terms of their APRs and monthly payments:

—or if one is significantly lower than the other

—then, it could be beneficial for you to refinance with that bank to save money over time by reducing your monthly payments and decreasing how long it will take before this debt is paid off completely (which means less time paying interest).

How will lenders look at me?

As a general rule, having a high credit score is good, and it can help you get better interest rates and even get approved for loans in the first place.

Your credit score will also make lenders more willing to lend you money if there is any doubt about your ability to repay the loan.

However, certain things hurt your credit score and can make it harder for you to secure financing from banks or other financial institutions.

One of these factors is how much debt (and other obligations) you currently have versus how much money is coming into your household every month (your ‘debt-to-income ratio’).

For example: If someone has $10,000 worth of joint student loans with their spouse but only brings home $1,000 per month after taxes—that means they’re spending 20 percent more than they’re bringing in each month.

This imbalance may raise concerns among lenders who want their customers’ finances balanced before they lend them money.

The lower this ratio gets, the better off you’ll be when applying for new loans and lines of credit;

however, if it gets too low, then this could cause other problems as well, so proceed cautiously if going below 30 percent DTI might not work out well, either way, depending on what kind

You can always refinance your car loan, but you risk hurting your credit score.

It is possible to refinish a car loan. It’s not always easy, but it can be done. The first thing you must do is determine if refinishing your car loan is right for you.

If you’re looking to get a lower interest rate, this process will likely work in your favor.

However, if the loan is already at a low-interest rate and has an extended payment period (e.g., 36 months), then refinishing might not be worth the trouble.

If you decide to go ahead with refinishing, prepare yourself: You might end up hurting your credit score by as much as 50 points.

That’s because refinancing involves applying for new credit—and that counts against your overall credit score when calculating how risky it would be for lenders or landlords to extend them further credit (i.e., loans).

But don’t let that deter you from pursuing what could be an excellent opportunity for saving money on interest payments each month.

Just make sure to shop around first before finding an online lender who offers competitive rates without hurting other aspects of their service agreement, such as late fees or annual percentage rates (APRs).


In the end, it’s up to you whether or not you want to refinance your loan. It can be a great way to save money on interest and get out of debt faster, but it’s also essential to remember how it might affect your credit score if you’re planning on buying another car anytime soon.

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