Does Refinancing a Car Hurt Your Credit?

Yes, refinancing your car will lower your credit score. But this ding to your credit score is temporary, while the change in your auto loan’s interest rate will be permanent! In some cases, refinancing auto loans can even put cash in your pocket. In this blog, Indiana Members Credit Union is covering all your frequently asked questions about auto loan refinancing so you can make the decision which is in your best interest long-term. 

How Many Points Does a Refinance Affect Your Credit Score?

Refinancing your car loan will affect your credit score by around five points, because your lender will need to make a hard inquiry on your credit. This is true whether you refinance with your current lender or with a new one. The good news is that for 45 days, you can shop around for a loan without future inquiries affecting your credit any more. 

The second way an auto loan refinance can affect your credit score is a little less cut and dry. Depending on how long you have been paying down your current car loan, you may have paid off a nice amount of the balance. On your credit report this shows as having credit available to you, because the principal amount you owe is less than the original loan. When you refinance, this can make it look like you are using more credit, which can cause your score to lower by a few more points. 

Does Refinancing Help Your Credit Score?

Though you will see a small dip in your credit for a few months after refinancing, in the long run this strategic move can help your credit. Paying less interest can help you have money available for other obligations, or let you make more payments to the principal. You can pay the loan off faster, especially if you also have a new shorter loan term at the same time. While you won’t see the benefits to your credit in the first few months, you may see your score improve in the long run. 

Does Refinancing a Car Start Your Loan Over?

When you refinance a car, you are taking out a new loan to pay off the old one. So in a sense, you are starting the loan over. However, that doesn’t mean you have to take out the full amount of the original loan over again or finance the full purchase price. All you need is to take out enough to pay off your current balance on the loan. 

Part of the reason you might want to shop around for different lenders is to see the different terms and interest rates they can offer you. Will you be able to pay off the loan sooner, or pay less in the long run because of a lower interest rate? Those are the best times to refinance your car. 

In some cases, the new lender will pay the old one directly. In others, they will send you the money which you use to pay off the loan. In the second case, if you take out a new auto loan for greater than the balance of your current loan, you can even end up with money in your pocket. This is called a cash-out auto refinance. This might not be right for everyone, but in some cases it is a great option!

Does Refinancing a Car Extend the Loan Term?

You may end up with a longer loan term after refinancing, but still save money through a lower interest rate. In other cases, the loan term could be shorter with a similar interest rate because your credit score has improved! Remember, you have the power to negotiate a totally new loan when you are refinancing, including getting a shorter term loan. If your loan term is longer, you could end up paying more in the long run, even with a better interest rate.

How Long Does It Take For a Refinance to Show Up On Your Credit Report?

It can take anywhere from 30-90 days for the refinanced auto loan to show up on your credit report. This depends on lots of factors. Lenders are not required to report to credit bureaus, though they usually do. Some may report to only one or two of the three credit bureaus, so if you don’t see the loan on one report, check the others. And remember; just because the loan doesn’t show up on your credit report doesn’t mean the lender won’t report you if you stop making payments!

IMCU Will Talk You Through the Pros and Cons of Refinancing a Car

Refinancing a car is a significant decision. Will you really get a better deal in the long run? Is the effort worth the savings? You probably think you can’t trust a lender to give you a straight answer, but IMCU hopes we get the chance to change your mind. As a credit union, we are a non-profit organization committed to doing what is best for our members. We want to help you understand the terms and options available to you, and whether you can get a lower monthly payment or pay off your loan faster with the same monthly payments. We offer several ways you can get in touch with us to get the process started! Apply for a loan online right where you are, or visit one of our locations across Indiana to speak with a loan officer in person. We hope to hear from you soon!