If your credit score has improved, interest rates have gone down across the board, or you have simply realized that you didn't get a great deal on your auto loan, you may be thinking of refinancing. This basically means that you will be paying the current loan off with a new loan that comes with different terms. But you should know, while you are trying save money through refinancing, your credit rating may incur at least a little damage in the process.
A hard inquiry occurs when a lender or financial institution checks your credit to make a lending decision. Applying for new credit always results in a hard inquiry on your credit report, and this will lower your score by a few points.
Limit your applications. Even though one hard inquiry only does a little damage to your credit, multiple inquiries over a short period of time can add up to more significant score trauma. Of course you want to shop for the best rates, but try to narrow down your lender search to just a few candidates before submitting your applications.
Keep track. If you know that you will be applying for credit through more than one source, start monitoring your credit in order to stay informed about any impact that this activity is having on your credit health.
New Loans vs. Old Loans
Lenders like to see older loans on your credit report that have been kept current as opposed to newer loans that reflect little activity. That new loan also shows that you are using more of your available credit. So during the process of closing your old loan and starting your new one, your credit score could take a hit.
Some scoring models do take an old loan into consideration for up to ten years after it has been closed, but it still won't be weighted as heavily in the final analysis.
Weighing the Pros and Cons
Even with the small to moderate hit that you credit score will take, refinancing still makes sense for a lot of people. If you're worried about hurting the rating that you have worked so hard to build (or rebuild), you should keep a few things in mind.
Inquiries fall off. It only takes 2 years for a hard inquiry to fall completely off your credit report, and it will only impact your score for 1 year.
New loans turn into old loans. With prompt, regular payments on your new loan, your credit will be restored over time.
Be careful if you're considering a new mortgage or in opening additional lines of credit in the very near future. If this is the case, you may want to postpone refinancing your auto loan, especially if a score reduction will reduce your chances of being approved for your other credit needs.
Just Starting Out?
If you simply need financing for a car purchase, Auto Credit Express can help. Our qualified experts work with bad credit, very bad credit, and even no credit, and we can get you into the vehicle that you need as quickly as possible. Just fill out our auto loan application to get started today.