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Refinancing your auto loan can negatively affect your credit score, but not for the long term. Your credit score may drop a few points, but it should rebound in a short time — usually after a few months of on-time loan payments.
The possible benefits from refinancing a car — such as lower car payments and breathing room in your budget — may outweigh the downside of a slight, temporary decrease in your credit score.
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Why auto loan refinancing can lower your credit score
Car loan refinancing involves replacing your current auto loan with a new one, usually with a different lender. Refinancing might make sense if you want to reduce your interest rate, lower your monthly car payment, change your loan term or remove a co-applicant.
Applying to refinance your car loan is really applying for a new loan, so it can affect your credit score in several ways:
A hard inquiry on your credit report
When you apply for a loan, at some point in the process a lender will do a credit check that appears as a hard credit inquiry on your credit report. Typically a hard credit inquiry causes a small reduction in your credit score. For example, credit-scoring company FICO says a single credit inquiry can shave up to 5 points off your credit score.
Changes to average age of credit accounts
As previously noted, when you refinance and replace your old loan with a new one, it means that the original loan is paid off early. This can reduce the length of your credit history and average age of accounts — two factors that contribute to your credit score. The effect should be minimal though, since length of credit history is only 15% of a person’s total FICO score. For VantageScore, a credit-scoring company used by many auto lenders, age of credit history is listed as a “less influential” factor.
New account on your credit profile
If you qualify for and accept a loan offer, you'll typically see another small credit score dip. That’s because the new loan on your credit profile may indicate to a credit bureau that you’ve taken on new debt and increased your debt load. However, since the new loan replaces an existing one, especially if it’s about the same amount, any impact to your credit score should be minimal.
How to reduce the impact on your credit score
When refinancing a car, there are steps you can take to minimize the effect on your credit score.
Use pre-qualification to research auto refinance loans
If you’re uncertain whether you would qualify for an auto refinance loan, or you’re curious about what rate you might get, look for lenders that offer pre-qualification with a soft credit check.
Pre-qualification, when done with a soft credit inquiry, won’t affect your credit score. It doesn’t guarantee loan approval and rate estimates can change later in the process, but it’s useful for research prior to proceeding with a loan application — which will result in a hard credit inquiry.
When applying to multiple lenders, do it in a compact time frame
It’s always a good idea to apply to more than one lender to compare and find the lowest loan rate, but this will also result in multiple hard credit inquiries. The good news is that car loan inquiries done in a short window are typically considered to be one inquiry by credit-reporting companies.
VantageScore gives you a rolling 14-day period; FICO gives you 45 days. For less impact on your credit score, it's smart to submit all auto loan refinancing applications within these time frames.
» MORE: Pros and cons of refinancing a car
How long will auto refinancing affect your credit score?
If you manage your credit accounts well and make all payments on time, your score should recover in a short time — usually a few months. The hard credit inquiry will stay on your credit report for about two years, but it should stop affecting your credit score in less than a year.
When deciding whether to refinance your car, weigh the advantages — such as saving money with a lower interest rate — against the disadvantages of a slight and temporary decrease in your credit score.
FAQs
Refinancing a car can temporarily lower your credit score, but the benefits could outweigh a slight dip in your score. Shannon Bradley is a NerdWallet authority on auto loans. Before joining NerdWallet in 2020, Shannon spent 30-plus years as a writer, content manager and marketer in the financial services industry.
How badly does refinancing an auto loan hurt your credit? ›
Refinancing may lower your credit score a few points, but the impact to your credit score will only be temporary. Applying for a loan generates a hard inquiry. Refinancing may be worth it if rates have dropped since you took out your loan.
How much will my credit drop if I refinance my car? ›
The score impact of hard inquiries will fall off entirely within a year. Taking on new debt typically causes your credit score to dip, but because refinancing replaces an existing loan with another of roughly the same amount, its impact on your credit score is minimal.
What is the downfall of refinancing a car? ›
If you refinance and extend your loan's term, you are more likely to end up owing more than your vehicle's worth. This is called being upside-down or underwater on your loan. Your chances of going upside-down with a longer loan term increase because cars generally depreciate in value each year.
What disqualifies you from refinancing a car? ›
Having an LTV over 100 percent doesn't mean it's impossible to get an auto loan refinance, but it can make it more difficult. Most lenders look for an LTV below 125 percent. However, the lower your LTV, the better interest rate you can get.
What to avoid when refinancing a car? ›
If it seems right for you, make sure you avoid these common mistakes when it comes to refinancing so you can maximize your savings.
- Drawing It Out. While it may seem tempting to switch to a longer loan term, it usually isn't worth it in the long run. ...
- Going Upside-Down. ...
- Catching Penalties. ...
- Missing Payments. ...
- Waiting Too Long.
Refinancing may result in owing more over the course of your auto loan if a change in the loan term length, removing a co-borrower, credit score, payment amount, or interest rate contributes to a higher overall cost.
How much is a $40,000 car payment a month? ›
If you are offered a 2% interest rate for three years (or 36 months), 3% for four years (48 months), 4% for five years (60 months), and 5% for six years (72 months), your monthly payments for a $40,000 loan will be as follows: Three years – $1,146. Four years – $885. Five years – $737.
Why has my credit score dropped 100 points after refinance? ›
Why did your new mortgage drop your credit score by 100 points? Your new mortgage can cause your score to drop because it's a new account and likely a significant debt added to your credit history. Once you establish a positive payment history, your score will likely increase.
Is refinancing a car worth it? ›
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month — but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.
After you buy a car, you have to wait at least 60 to 90 days before you can refinance, since it takes about this long to transfer the title to your name. Generally, it's best practice to wait to refinance a car loan for at least six to 12 months.
What are the negative effects of refinancing? ›
Refinancing allows you to lengthen your loan term if you're having trouble making your payments. The downsides are that you'll be paying off your mortgage longer and you'll pay more in interest over time. However, a longer loan term can make your monthly payments more affordable and free up extra cash.
Is refinancing a car smart? ›
Refinancing your car loan can be a good idea if it allows you to save money on interest, but it's not the right financial move for every borrower. The best time to refinance is when interest rates have dropped or your credit score and DTI have improved.
Does refinancing your car look bad on your credit? ›
Yes, refinancing your auto loan will usually hurt your credit a little. But if you make your new loan payments on time, any damage to your score will likely be both temporary and small. Your credit could bounce back to its current score in as little as a few months.
What is a good credit score to refinance a car? ›
There is no minimum credit score required to refinance a car loan. That being said, there is a range that is considered a “good credit score” to refinance a car loan. In general, a credit score over 700 will unlock the best interest rates, and a credit score between 660-700 will give you access to standard rates.
What is not a good reason to refinance? ›
Key Takeaways. Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Is it a good idea to refinance your car loan? ›
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month — but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now will help you pay less overall.
What is the minimum credit score to refinance a car? ›
There is no minimum credit score required to refinance a car loan. That being said, there is a range that is considered a “good credit score” to refinance a car loan. In general, a credit score over 700 will unlock the best interest rates, and a credit score between 660-700 will give you access to standard rates.
How long should I wait to refinance my car with bad credit? ›
However, most financial experts agree that waiting six months before refinancing often will get you the best terms for your situation. It also gives you enough time to improve your credit score and get your financial situation in order.
What are the cons of refinancing debt? ›
Con: Refinancing takes time.
It takes a lot of resources, time, and money, to secure a lower rate. This can be taxing on your life, especially if you don't see a large change in payments or interest.
