Will refinancing a car hurt your credit score?

If you’re currently in a car loan that you’re unhappy with, you may have heard of the term “refinance.” This might be something to consider if your credit score has improved or interest rates have dropped since you got your current loan. Refinancing can be a good option to save money, but it’s crucial to know how it can affect other important factors, namely your credit score. If you’re wondering if refinancing will hurt your credit score, here’s what you need to know.

How does refinancing work? Many borrowers who choose to refinance do so in order to obtain a lower interest rate and/or monthly payment. Refinancing can do this when you apply for a new loan, usually from a new lender, by closing your old loan and marking it as “paid in full” on your credit reports. In order to qualify for a refinance, borrowers generally must have had their old loan for two years, and the new lender must first approve them by reviewing their credit and debt-to-equity ratio.

Although refinancing can be a good option to reduce your payments, applying for refinancing leads to difficult inquiries on your credit report. If you’re not careful how you apply, it can really hurt your credit score.

What is a credit application? There are two types of surveys: soft and hard. A soft inquiry is where you or someone you approve checks your credit and while it may lower your score slightly, the effects wear off fairly quickly. The real concern when it comes to refinancing is difficult inquiries.

Serious investigation occurs when a lender or financial institution checks your credit report to see if you qualify for a loan decision such as a car loan. When you submit an application for new credit, such as a refinance, it will always lead the person you asked to do a thorough investigation of your credit. Serious inquiries, like informal inquiries, lower your credit score by a few points each time, so it’s important to limit your number of new loan requests. It takes two years for the effects of a serious investigation to fade from your credit report, although it only has a real impact on your credit score for one year.

Multiple serious inquiries can lower your credit score very quickly if you’re not careful, but shopping around to make sure you’re getting the best rates is the best thing to do. In order to avoid hurting your credit score, try to limit your options to just a few applicants before submitting applications and be sure to track your score so you are aware of the impact of applications on your credit.

How does fare shopping help? The good news is that credit bureaus recognize a practice called “rate shopping”. This happens when you submit multiple loan applications within a short period of time. As long as you submit all of your loan applications within 30-45 days, the credit bureaus will count each of your applications as one serious inquiry. This means that your credit will only reduce the amount it would have had you only submitted one application. Since difficult applications can lower your score by 10-20 points each time, you’ll want to make sure you submit all applications within that 30-45 day window.

Is refinancing really worth it? Although your score may suffer throughout the process, refinancing can still be worth it. Once you’ve gotten a few offers from your fare shopping, you can compare them using online calculators and figure out which one is right for you. To figure out which one will save you the most money in the long run, you’ll need the following: your current loan amount, monthly payment, interest rate and loan term, and the same values ​​as new lenders. have offered you.

For example, suppose you have a car loan of $15,000, a monthly payment of $365, an interest rate of 16%, and a loan term of 60 months with a current balance of $8,726. If you managed to qualify for a reduced interest rate of 10% by paying on time each month and increasing your credit score, your refinanced car loan for the remaining 36 months could save you almost $600 compared to to your original loan. This would be done by reducing your total interest paid by $563, and your monthly payment would decrease by $83.


Current loan (16%)

New loan (10%)


Monthly payment



Decrease of $83

Months left




Remaining interest



Decrease of $563

The key to refinancing is to make sure you do it right in a timely manner, and you could end up saving money. Be sure to do the math and see if refinancing your car loan is the right decision for you.

If you would like to try refinancing, Auto Credit Express can put you in touch with a local dealer. We have a dealer network and we will work to find the right one for you. Complete our simple and secure online auto loan application form to get started.