Is refinancing your car hurting your credit?

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Refinancing your car loan can be a great way to get better interest rates or different loan terms. But does refinancing hurt your credit?

We’ll explain how refinancing can affect your credit score and whether refinancing is a good idea.

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Is Refinancing Your Car Hurting Your Credit Score?

The short answer is yes—financing can negatively impact your credit score.

When you refinance a car loan, you must apply for a new loan, which results in a difficult credit check. The good news is that one question doesn’t last long on your credit report.

Another reason why refinancing can negatively affect your credit is that it reduces the age of your loan. One of the factors that contribute to your credit is the average length of your credit history. As soon as you pay off your current loan, the average age of your credit can drop.

In general, the effect of refinancing on your FICO score should be minimal. However, it’s still a good idea to complete a credit check after refinancing to make sure it doesn’t affect your score too much.

How Does Car Loan Refinancing Work?

Refinancing a car loan is the process of replacing your current car loan with a new one. Most borrowers refinance to get lower interest rates, lower monthly payments, or different payment terms.

To refinance, you must submit a new car loan application, just as you would with your initial loan. If approved, you can compare the interest rate on the new loan to the interest rate you are currently paying. If interest rates are lower, refinancing will help you pay less each month to borrow money.

When Should You Refinance a Car?

Because refinancing a car can temporarily affect your credit score, you should first consider whether it’s the right financial move. Refinancing a car loan may be a good decision for you if you meet any of the following criteria:

  • Interest rates have decreased: If average interest rate has declined since you took out your original loan, it may be worth refinancing.
  • Your credit score has improved: Making payments on time for a long period of time can improve your credit score. If your credit score has improved significantly since your original loan, you can save money by refinancing.
  • Your car has a good resale value: If your car is worth more than your car loan, refinancing can also help you save. Lenders may be more willing to offer a better interest rate if you the car retains its value.
  • Your loan is too expensive: Lower interest rates can give you significant savings each month, which may be important if your initial car loan is too expensive. Refinancing your car loan is probably one of the best financial decisions when it comes to keeping more money in your wallet.
  • You have a co-signer: Co-signers with good credit and a good payment history can also help qualify you for better rates. A trusted friend or family member who is willing to sign on for your car loan can help you save money.
  • You need cash: If you have positive equity in your vehicle, you may also qualify for a cash car refinance. This type of auto loan refinancing replaces your existing loan and pays the rest in cash.

Things to Consider Before Refinancing Car Loans

Refinancing can be a great solution for some vehicle owners, but it’s not the best option for everyone. Here are some things you should consider before you refinance your car loan:

  • Your credit score has decreased since your last car loan: If your credit score has dropped since your initial loan application, it is less likely that you will qualify for a better interest rate. In that case, it may be better to wait until you repair your credit or find a co-signer to refinance.
  • Your lender imposes a prepayment penalty: Some auto lenders charge prepayment penalties if you pay off your loan early. In addition, you may have to make another down payment or pay an origination fee for a new loan. You’ll want to calculate these additional costs to decide if the savings are worth it.
  • The value of your vehicle is less than what you owe: You may find it difficult to refinance a car loan if you have negative equity in your vehicle. If you find a lender to agree to you, expect to pay much higher monthly payments.
  • Your car is almost paid off: There may be no point in refinancing your car loan if you have already paid off most of the balance. Most of the interest you pay on a car loan is at the beginning of the term. In this case, you can pay more by replacing your current loan with a new one.

How to Minimize the Negative Impact on Your Credit Score

Even if you have a very good credit score, refinancing may negatively affect your credit for a short time. Although not completely avoidable, there are several ways to minimize its impact, including:

Compare Rates in the Same Time Period

Comparing interest rates from various lenders is one of the best ways to get a good rate. The main goal of refinancing a car loan is to qualify for lower interest rates, which can lead to lower monthly payments. Credit bureaus usually combine inquiries of the same type, so try to compare rates within a week or two to avoid a big hit.

Check Your Credit Score

Checking your credit before applying for a loan is always a good idea. Before you start applying for a refinancing loan, run credit reports from the three major credit bureaus: Equifax, Experian, and TransUnion. That US government allows all consumers to receive one free credit report per year from all major reporting bureaus.

Get Pre-Qualified

Most lenders offer a pre-qualification, also called a pre-approval, which is a letter stating how much money they are willing to lend you, based on the loan terms you choose. Getting pre-approved shows you how much money you can spend, and at what interest rate, without approving the loan and signing up.

Avoid Applying for Other Types of Loans

When you apply for a refinancing loan, avoid applying for other types of loans during this time. Otherwise, you may be subject to some harsh credit checks, which will impact your credit score even more. Try to time your car refinance to a time when you don’t need another type of loan, such as a mortgage.

Can You Refinance a Car with Bad Credit?

While it’s possible to refinance a car with bad credit, it’s not always the best option. You usually need good to very good credit to qualify for better loan interest rates. With bad credit, finding good interest rates may be much more difficult.

However, you can still explore refinancing, even with bad credit. Getting pre-approved from several different lenders will show you the interest rates you can meet. If you find the interest rate is lower than what you’re currently paying, refinancing can be a good option.

Another thing to consider is using a co-signer for your refinancing loan. If you have bad credit, co-signing a new loan with someone with good credit can help qualify you for a better interest rate. However, refinancing with a co-signer who also has bad credit probably won’t help.

Is It Worth Refinancing Your Car?

While refinancing your existing car loan can temporarily affect your credit score, the long-term cost savings are usually worth it. Refinancing can save you a lot of money, especially if your credit score has improved since you took out a current loan.

Lower monthly payments can also make it easier to pay for other loans you may have, which also improves your credit.

Headshot of Elizabeth Rivelli

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with over three years experience in finance and personal insurance. He has extensive knowledge of various lines of insurance, including auto insurance and property insurance. His byline has appeared in dozens of online financial publications, such as The Balance, Investopedia,, Forbes and Bankrate.

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