Ask Credit Karma: How Does My Auto Loan Refinance Affect My Credit?
Would you mind covering how or if a refinance on a car loan affects one’s credit score? I am thinking of doing this, but can’t find info about it anywhere. Thanks so much! Love you guys!! – Rebecca W.
Refinancing your auto loan can be a great way to save money, if you get approved for a lower interest rate. A good credit score is the way to get there.
When you apply to refinance your auto loan, it will cause a hard inquiry on your credit report. A hard inquiry is when a lender, credit card issuer or other financial institution does a credit check to assess whether or not to approve you for a line of credit. Each hard inquiry generally drops your score by a few points and will lessen in impact after two to three months. However, it will remain on your credit report for two years.
For that reason, you should avoid applying for several loan options at one time. Multiple hard inquiries will significantly decrease your credit score for a period of time and tell lenders that you may be desperate for credit. Instead, focus on building up your credit to better your chances for approval, finding the right lender, and doing your research to find your best loan option.
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After you’re approved for refinance, the original lender will close out the old loan and the new loan will appear on your credit report. So, when it comes to your lines of credit on your report, you’ll come out even. The only other impact your refinance can have on your credit score depends on your monthly payments; as long as you pay on-time every month, your refinance can positively affect your credit score.
In order to make sure you get the best rates possible, follow this checklist before applying to refinance your auto loan:
- Get your credit report. If you haven’t gotten your free credit report from Annualcreditreport.com this year, get it and comb through it for any errors. The three most common errors are outdated personal information, mistaken or fraudulent accounts and incorrect account details. If you do find an error, dispute it with the credit bureaus and reporting company.
- Take some time. The better your credit, the better your chance for approval and the more money you can save by landing the lowest interest rate. Spend the time to work on and improve your credit score by honing in on your credit card utilization rate, staying on top of payments and monitoring fluctuations in your score.
- Research auto loans. Find the best loan for your auto refinance by comparing rates and terms with Credit Karma’s “My Savings” dashboard. My Savings gathers information from multiple lenders in one place, so you can do your research easily and see how much you can save based on consumer reviews and rate comparisons. Make sure you always read all of the details and fine print of an offer before taking it.
People often refinance their auto loan to reduce their monthly payments, which extends their loan. But this approach can also mean paying more in interest over the life of the auto loan. The best reason to refinance is to get the lowest interest rate possible. Before applying to refinance your loan, do the math and make sure it’s the right move to make to save you money in the long run.