Refinancing a car loan can temporarily hurt your credit score, but it's usually worth it.
When you refinance your vehicle, you have a new lender pay off the original lender to take over the title of your car. You then begin making your payments to the new lender, usually under more favorable financial terms.
Does refinancing a car hurt your credit score?
When you first purchased the car, it had an impact on your credit score, though your credit has likely been growing as you make consistent payments on the vehicle. And now that you’re considering refinancing, that too can take its toll when it comes to your credit score.
Why does refinancing hurt your credit?
There are a few reasons why refinancing your car can have a negative impact on your credit score.
With a refinanced loan, you're ending an existing loan agreement early, even though you’re meeting all your financial obligations on the current loan to the lender. The fact that you’ll have a shorter commitment on your credit history will usually result in a negative hit to your credit score for a short period.
Does refinancing a car have a big impact on your credit score?
No. Though refinancing does hurt your credit score, refinancing will only have a minimal impact at best.
Neither a hard inquiry credit check nor lessening your long-term financial commitments on your old loan will cause a big hit to your credit score, and furthermore, they’ll be off your credit record soon enough.
A hard inquiry typically only stays on your credit score for half a year, and the small hit to your credit from shortening your commitment to your original car loan will be made up for as you begin to pay off your new loans.
Should you avoid refinancing your car to keep your credit score high?
It’s a much better financial decision to take on the right financing plan rather than try and preserve every last drop of your credit score. Your wallet will appreciate the new, refinanced loan.
Whether you’re looking to shorten or extend your loan term, make sure you have a loan that fits your budget so you’re only paying what you have to.