It is crystal clear that every time we take out a new line of credit, we will face a minor drop in our credit score. Since refinancing means drawing a new line, our credit is bound to go downhill even if we didn’t get a new vehicle.
So will refinancing my vehicle hurt my credit? Yes, it will. Here are some top ways how refinancing may affect your overall credit score.
How Will Refinancing My Vehicle Hurt My Credit?
Refinancing is the option that many opt to lower their monthly payment amount. You can do so by taking out a new car loan for the same vehicle. Refinancing proves to be efficient if you find a new loan with relatively lower interest rates.
By clearing the payment for the original loan, you close its account and open a new account for the refinanced loan. The refinancing process also requires a new credit, as the new lenders will ask for new credit reports. The refinancing procedure includes three steps:
- Sending approval for new credit
- Closing the previous loan account
- Opening a new account
This procedure has impacted two different features of your overall FICO score. Be cautious! It can result in a meager drop in your credit score.
New credit 10%
The new credit portion is responsible for evaluating how many times you have applied for a new line of credit. When refinancing, the lender investigates your credit report, eventually resulting in a slight drop in the score. Your score drops from between five and twenty points, depending on your current credit score and history. The refinancing procedure also requests a hard inquiry on your credit, which can affect your credit score up to 12 months or even two years.
Length of credit history 10%
This category of the FICO credit score evaluates the length of your credit history and the ages of all of your previous credit lines. The older they are, the more beneficial it is for your credit score. When you close one account and start a new one to refinance, you reduce the age for all of your currently active credit lines. It will keep hurting your credit score until the account has matured enough.
So, this is how much refinancing your vehicle will hurt your credit. It is normal to see a sudden drop in your credit score right after refinancing. But many borrowers have reported that the credit score tends to return once you make consistent monthly payments for the refinanced car loan. Even if your credit score hurts from the refinancing process, it is not a big hassle since you will save a hefty sum of money through the refinanced loan.
Why Do People Choose to Refinance Their Vehicles?
Most borrowers intend to get a refinanced loan to save money from their monthly car payment amount. They do so by getting a loan with lower interest rates or switching to a longer-term refinanced loan. However, finding a loan with a low-interest rate is the authentic and best way to save a hefty amount of money. Because when extending the loan term, you will have to pay interest at the original rate, which can be even more costly than the original plan.
Borrowers who had bad credit when taking out the original car loan tend to look for refinancing because they have gradually improved their score through consistent monthly payments. Qualifying for a loan with a low-interest rate is the only key to saving up a lot of money from interest charges.
If you are dissatisfied with your original car loan, consider refinancing. And if your credit score has progressed since you last took out the loan, you may qualify for a refinanced loan.
How to Finance With Bad Credit?
Are you looking for lending resources while having bad credit? Then your search ends here. CarLoanRefinancing is the best and reliable platform to provide you with trustworthy lending resources. All credit goes to our widespread network of expert finance dealerships that help bad credit borrowers establish relations with suitable dealers that can help them with their bad credit.
To find out if you have a finance dealership around you, fill out our free auto loan request form.