Credit scores and auto loans are tied together. You can’t get a good loan without a good credit score. Many people have got an auto loan and then improved their credit score. This means they’re potentially eligible for a better loan, which is where refinancing your car comes in to play. Refinancing is an alluring option to reduce payments and pay less for your car over the course of the loan period, but will refinancing your auto loan hurt your credit score?

What Happens When You Refinance?

a happy family that has refinanced their auto loan

When you refinance your auto loan, you find a new loan with a better interest rate or term that will pay off your old loan. Once you’ve signed for the new loan, you pay off that loan instead of your original one. This can be advantageous to you if you can find a new loan with a lower interest rate, or if you need to dramatically reduce your monthly payment. It’s best to refinance your auto loan if your credit score has recently improved or if interest rates have dropped considerably.

Hard Inquiries Can Negatively Impact Your Credit Score

auto refinancing application form

It’s not a good idea to have your credit score checked a lot by lenders. If you’re refinancing, at least one lender will have to check your credit. This type of check on your credit falls under the category of hard inquiries. There are two types of credit inquiries: hard and soft.

Soft inquiries occur when you or a company does a credit check as part of a routine evaluation, like a background check. These types of credit checks don’t reduce your credit score. On the other hand, hard inquiries do. A hard inquiry happens with mortgage applications, credit card applications, personal loan applications, and auto loan applications. Refinancing your auto loan would likely have a negative impact on your credit score, but only for a limited time. Once you start paying on that new loan regularly, your credit score should rebound fairly quickly.  

Actually Refinancing Your Car Won’t Hurt Your Credit Score

list of credit scores

The actual act of refinancing won’t hurt your credit score. While having a bunch of hard inquiries on your credit history can have a negative effect, actually going through with the refinance of your auto loan will have virtually no impact on your credit score. All that happens is one loan is closed and another opened, so your credit score should stay virtually the same.

When shopping around for the best auto refinancing deal, make sure you know your credit score and your current interest rate to eliminate the need for you to do many hard inquiries. If you do that, you’ll minimize the one thing that can reduce your credit score during the refinancing process.

Refinance Your Auto Loan