Does Refinancing a Car Hurt Your Credit?

Refinancing a loan involves applying for a new loan in order to pay off the original debt. Ideally, you can refinance to a new loan with a lower interest rate. 

But should you refinance? Does refinancing a car hurt your credit? What else should you consider before taking this step? This guide explores everything you need to know about auto loan refinancing.

Should I refinance my car?

Refinancing might make sense if you can get a substantially lower interest rate on the new loan. This can help you save money on interest over time, plus enjoy a lower monthly payment. You can use an auto refinance calculator to see how much you might save. 

But that’s not the only reason to consider refinancing. It may be a good idea to refinance your vehicle if you meet one or more of the following situations:

Your credit has improved. In this case, it’s possible you may qualify for better terms, including a lower annual percentage rate (APR). Be sure to check your credit score frequently to see where you’re at. 

You originally financed with a dealership. Dealerships often don’t offer the best interest rates on loans. By refinancing with a bank or credit union, you may be able to get a lower rate. 

You want to change the loan term. If you want to significantly shorten or lengthen your loan term length, refinancing is often the only way to do this. 

But like any financial decision, there are both advantages and disadvantages to consider. 

Pros

• Could help you save money on interest.

• Could lower your monthly payments.

• Allows you to change the length of a loan term and other details. 

Cons

• Might involve costs to apply.

• There may be a prepayment penalty on your existing loan.

• Might affect your credit.

Do I need a certain credit score to refinance my car loan?

Every lender has different requirements. There’s no set requirement in terms of credit score. 

With that said, here’s something important to remember: If your credit score hasn’t improved since you applied for the original loan, it’s unlikely that you would qualify for a better interest rate than what you already have. 

And in general, the higher your score, the better rates you will be offered. If you have a good credit score, you’ll have more loan options available to you and likely lower interest rates as well. 

In addition to credit score, lenders consider other factors like debt to income ratio and your current income level when considering your creditworthiness. 

Having an auto loan and making on-time payments can help improve your credit. But does refinancing a car hurt your credit? It might have a small negative impact — more on this below. 

Does refinancing a car hurt your credit?

Refinancing an auto loan can have a small negative impact on your credit. There are a few reasons for this.

First off, when you apply for a loan the lender will do a hard credit pull. A hard pull can ding your credit score by a few points, although this effect is temporary. Hard pulls might reduce your score by around five points, but this effect diminishes over time. 

If you apply for several loans to shop for the best rate, do your best to bunch the applications into a short period of time. Similar applications made within a 14-day period are considered together when it comes to your credit score. Three hard inquiries made in the same week will have a similar impact as a single hard pull — but three hard inquiries spread out over three months would have more of a negative impact. 

Opening a new loan can also temporarily ding your credit. This is because you’re technically taking on new debt. However, since a refinance pays off your old loan, the end result is neutral, and the impact on your credit will be minimal. 

In short, does refinancing a car hurt your credit? Your credit score might dip by five to 10  points due to hard credit pulls, but this effect is temporary. Ultimately, refinancing a loan doesn’t have a substantial impact on credit scores. 

How to refinance a car loan

If you’ve determined that refinancing makes sense in your situation, here’s how to move forward with refinancing. 

1. Review your current loan

First, check the details of your current loan. Take note of details like:

• The loan total balance/payoff amount.

• The current interest rate.

• The current monthly payment.

You’ll need this information to compare your existing loan to other options, and you’ll need the loan payoff amount in order to apply for a new loan. 

2. Shop around for the best interest rates

Start looking around for your different options. You can start with banks or credit unions that you already have accounts with or shop around online. You can use a comparison tool like Bankrate to get started. 

3. Get prequalified

Once you’ve found a few good options, it’s wise to get prequalified with two to three different lenders. This process requires that you submit your personal details, income and other information required by the lender, and have your credit pulled. 

But remember, multiple credit inquiries within 14 days will be considered as a single inquiry for credit score purposes, so you don’t need to worry about negatively affecting your credit. 

4. Apply and get your paperwork in order

When you’ve found the best option, apply for the loan directly. You’ll need to submit income information, credit information and information about your existing auto loan. 

The new lender may pay off your old loan directly, or they may send you a check to pay it off yourself. Either way, you’ll want to follow up with both your new and old lenders to make sure everything was processed correctly. 

Bottom line

Refinancing a car loan might have a small negative impact on your credit, but the effect will diminish over time. If refinancing makes financial sense, it’s typically worth the small ding to your credit score. 

Sometimes it might make sense to try to pay off your car loan aggressively — particularly if it’s your only form of debt. On the other hand, there may be disadvantages to paying off a car loan early if you have higher-interest debt. 

If you have credit card debt, it’s likely that it’s at a higher APR than a car loan. Credit card debt should be your priority in this case. 

Tally† is an app that helps qualifying Americans consolidate credit card balances into a lower interest line of credit. Learn how Tally works. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.