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. There are a lot of reasons to refinance, but many people fear that refinancing their car will hurt their credit. Is that a real risk? Here’s what you should know.
Does refinancing a car loan hurt your credit score?
Yes, in most cases, refinancing your auto loan will cause a small hit to your credit score. This might seem a little daunting at first, but every major purchase has a small, temporary hit to 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 a car hurt your credit score?
There are a few reasons why refinancing your car can have a negative impact on your credit score. The first is that before approving your refinancing application, the lender will likely perform a hard inquiry on your credit score, which hurts your credit a little bit. But don’t worry: a hard credit inquiry disappears from your credit score soon, usually after only six months.
Furthermore, your credit can be hurt by the fact that refinancing lessens the length of your financial commitments. Your credit is raised by long-term financial commitments, assuming you have a reliable monthly payment history. Contrary to popular belief, it’s better to pay something off over time than all at once, at least in terms of 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. Both of the above reasons why refinancing hurts your credit score 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 loans.
Should you avoid refinancing your car to keep your credit score high?
No. If it makes good financial sense for you to refinance your car, you should go ahead and do it, and not worry about your credit score. Your credit score will only be impacted a very small amount, and it will quickly rebound over the coming months.
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.