Should You Refinance Your Car Loan?
When deciding whether to refinance your car loan, the short-term impact it can have on your credit is hardly an issue. The factors you should consider include the following.
Your credit score
If your credit has improved since buying your car, refinancing could get you a lower rate, saving you thousands in the long run.
Your ability to make monthly payments
If your ability to make payments has increased, refinancing can help you pay off your car loan in less time and save on interest.
Current interest rates
If market interest rates have dropped, then refinancing could get you a better rate overall. The savings you receive will typically balance out any hit to your credit score resulting from applying to refinance your loan.
How Does Refinancing A Car Loan Impact Credit?
In most cases, refinancing a car loan can cause your credit to take a small dip, but that dip is usually temporary, especially if you’re on time making car payments afterward. Often, refinancing can be a great option despite the small hit to your credit score since it can help you save money long-term.
Short-Term Impacts Of Refinancing A Car Loan
There are a few reasons why refinancing can cause your credit score to drop slightly, and they have to do with how your credit score is calculated.
Hard credit inquiry
For instance, any time you apply for refinancing, your lender will have to make a hard pull on your credit report. That counts as new credit in your credit history, and it could cause your score to drop.
Any time a hard inquiry is made, it’s likely to cause this small dip unless other conditions apply.
If multiple hard inquiries are made on your credit report within a certain period, it may not cause too much of a dip in your score. That’s because credit bureaus will roll multiple inquiries for the same type of loan into one, causing only a single drop of a few points instead of multiple.
The time frame varies from one bureau to the next, but it’s generally between 14 and 45 days. So, if you apply to multiple lenders within two weeks, you’ll see only a minimal drop in your score.
Taking on new debt
In addition to the effects of having hard inquiries made on your credit, taking on new debt can also affect your score. As credit bureaus see it, that is because you haven’t yet proven your ability to handle the new debt. However, with refinancing a car loan, your new debt replaces your old debt, so the change is fairly minimal.
Long-Term Impacts Of Refinancing A Car Loan
The above changes in your credit are typically only temporary. As long as you’re responsible in making payments on time and managing your debt, you’ll most likely see your credit score recover within a few months.
Additionally, the lower your principle, the better it looks on your credit report. Making payments on time improves your credit by showing that you can meet your financial obligations, and since refinancing can make those payments easier, your odds of building good credit are greater.
Overall, refinancing can be a wise move if your credit score has improved since initially taking out your loan and if you are better able to make your loan payments on time.
How Your Credit Affects The Process Of Refinancing A Car Loan
While refinancing can impact your credit, your credit can also impact the refinancing process. The higher your credit score, the better your options for refinancing your car loan.
One of the main benefits of good credit is the fact that it will usually get you better interest rates on loans. This is because your lender will see you as a low-risk borrower, and they won’t have as much in the way of potential losses to cover.
In addition, lenders want borrowers with good credit because they know they’re reliable when it comes to paying off their debts. As such, lenders will offer lower rates to attract borrowers with higher credit scores.
Higher chances of approval
A high credit score improves your chances of being approved when you apply for refinancing.
On the other hand, lower credit could impact your chances of being approved, which can ultimately make the process more stressful and drawn out while yielding subpar results.
If you’re interested in refinancing your car loan Freedom Credit Union can help you through the process, often offering favorable rates and flexible terms.