Refinancing an auto loan can lower your credit temporarily but lower your car payments and allow you some wiggle room in your budget. If you’re worried about how refinancing a car loan can impact your credit score, here’s what you must know before you apply for refinancing.
How Does Auto Loan Refinancing Work?
Auto loan refinancing is comparable to taking out a new loan. You’ll take out a new loan to settle the remainder of your existing car loan. Ideally, the new loan should offer better terms and a lower interest rate than your existing loan.
You can apply to multiple lenders when looking for a loan and pick one with the most favorable terms. To help you find a lender offering favorable terms, you can calculate auto loan refinance rates across several lenders. The experts at Lantern by SoFi recommend doing this because it will show whether refinancing can lower your monthly payments.
Once you ascertain that refinancing can save you money and choose a suitable refinancing lender, the new lender will then update the lender that issued the original loan. The new lender will then take over the legal right to repossess your car if you default on payments, and you’ll start making payments to the new lender until you’ve settled the new loan.
How Can Auto Loan Refinancing Lower Your Credit Score?
When you apply for a refinancing loan, the lender usually performs a credit check that may cause a hard inquiry to be noted on your credit report. The hard inquiry usually causes a slight decline in your credit score. Fortunately, its effects clear after roughly six months.
If you’re eligible for and obtain a loan, you’ll also see another slight dip in your credit score. However, this won’t affect your credit score significantly since refinancing replaces the original loan with a new loan that’s roughly the same amount.
How to Prepare for Auto Loan Refinancing
Here’s what you should do when preparing to refinance a car loan:
Check Your Credit Score
Checking your credit won’t harm your credit score, and it can give you valuable insights into how potential lenders may review your loan application. You may get a free annual credit report from any of the three nationwide credit bureaus: Equifax, TransUnion, and Experian.
Fix Credit Report Errors
Once you obtain your credit report, check it closely to ensure it contains no errors that can potentially prevent your loan application from being approved. If you encounter any errors, consider disputing them before applying for auto loan refinancing.
Improve Your Credit Score
As you compare loan terms and interest rates from various refinancing lenders, you can take some measures to boost your credit score. Some measures you can take include:
- Continuing to pay your bills on time
- Paying down balances on your credit cards
Doing these two things can improve your credit score quickly and boost your chances of getting a loan with a reasonable interest rate and terms.
If you currently have an auto loan, refinancing can help you reduce your monthly payments and leave you with more money to spare. Use an auto loan refinancing calculator to compare your existing loan with a new one to determine whether refinancing can save you money.
