Many borrowers choose to refinance their vehicle in order to get a better rate and/or lower payment. It usually takes at least two years before you can refinance to get better terms, especially if you started out with bad credit. While refinancing can help you save money, it can also hurt your credit score if you rate shop for too long.
How Refinancing Could Drop Your Credit Score
Refinancing works this way: you apply for a new loan – usually with a different lender – and the lender qualifies you by checking your credit and debt to income ratio, among other things. Once approved, your old loan is paid off and listed as “paid in full” on your credit reports, then you begin making payments on the new car loan.
When you choose to refinance, you should rate shop in order to find the best deal, but it can backfire if you don’t do it properly. You should do it in a specific time frame – typically 14 to 45 days. If done within this amount of time, you can avoid multiple hard inquiries on your credit reports. If you continue to rate shop past that time frame, multiple inquiries could appear on your credit reports that lower your credit score, generally by 10 to 20 points each.
Determining if You Should Refinance
Once you start rate shopping and have a few offers to compare, you can determine which deal saves you the most money. One of the best ways to figure out if you’re getting a good deal is by using online tools and calculators. What you need is your current loan amount, monthly payment, interest rate, loan term, and these same values offered by the lenders you shopped.
For example, let’s say you took out an auto loan for $15,000 with bad credit two years ago with a monthly payment of $365, an interest rate of 16 percent, a term of 60 months, and your current balance is $8,726. During that time, you paid your bills on time each month, and raised your credit score to the point you were able to qualify for a 10 percent interest rate. Here’s what your current loan looks like compared to this refinance offer:
- Refinance amount: $8,726
- Interest rate: 10 percent
- Loan term: 36 months
|Current Loan||New Loan||Difference|
|Monthly Payment||$365||$282||Decreases by $83|
|Interest Remaining||$1,973||$1,410||Decreases by $563|
With this example, your estimated savings over the remainder of the loan is nearly $600 and you get a lower monthly payment.
The Bottom Line
Refinancing is a great way to get a better rate, but it can hurt your credit score if you aren’t careful. The key is to get the refinancing process done in a timely manner. So, do the math and figure out if refinancing your car loan is the right thing to do. When you're ready, fill out the secure refinance request form on our website to receive online quotes.
Auto Credit Express can also connect you to a local dealer if you need an auto loan. We work with dealerships all across the country that are experts in special finance, and we'll work to match you with a dealer near you if you fill out our simple and secure car loan request form online.