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If you're struggling with high car payments, refinancing your auto loan might seem like a smart solution. But before making a move, you may be wondering: Does refinancing a car hurt your credit? The short answer is that while it will likely cause your credit to dip a few points temporarily, the long-term outlook is much more positive.
Understanding how refinancing affects your credit can help you make a confident, informed decision about whether it’s the right option for your financial situation.
Short-Term Effects on Your Credit Score
When you apply to refinance your auto loan, lenders conduct a hard credit inquiry to assess your creditworthiness. This inquiry can cause your credit score to drop slightly—typically by about 5 to 10 points, according to Experian.
The good news? This dip is temporary. Hard inquiries stay on your credit report for up to two years but only impact your score for about 12 months.
Tip: Rate shopping won’t hurt your credit if done right. If you submit multiple applications within a 30-day window, most credit scoring models (like FICO) count them as a single inquiry.
Long-Term Effects: Can It Actually Help?
While refinancing your auto loan may lead to a small, temporary dip in your credit score, the long-term outlook is often much more positive, especially if the new loan is easier to manage.
Once your new loan is in place, every on-time payment you make contributes to your payment history, which is the single most important factor in your credit score. If refinancing lowers your monthly payment, that extra breathing room can make it easier to stay on top of your obligations, not just on your auto loan, but across the board.
Refinancing can also support your overall financial profile in more subtle ways. Lower payments can improve your debt-to-income ratio, which may help if you’re planning to apply for other types of credit in the future. And while refinancing does replace your original loan (which can slightly reduce the average age of your accounts), it also keeps a healthy installment loan in your credit mix—another factor scoring models look for.
Pros and Cons of Refinancing a Car Loan
Like any financial decision, refinancing has its advantages and drawbacks. Let’s explore the potential upsides and trade-offs.
Benefits of Refinancing Your Auto Loan
Refinancing can offer some significant benefits, especially if your financial situation or rates on auto loans have improved since you first got your loan:
Lower interest rates: If your credit has improved or rates have dropped since your original loan, you could qualify for a much better rate. This can significantly reduce the amount of interest you pay over the life of the loan, leading to real long-term savings.
Reduced monthly payments: A lower interest rate or longer loan term can bring your monthly payment down. This can make your auto loan more manageable and free up money in your monthly budget.
Improved cash flow: When your monthly payment decreases, you have more flexibility in your budget. You might choose to build an emergency fund, pay down other debt, or allocate money toward savings and investments. These improved financial habits can also positively impact your credit over time.
Drawbacks of Refinancing Your Auto Loan
However, refinancing isn’t always a no-brainer. Here are a few things to consider before moving forward:
Temporary credit score dip: As mentioned earlier, the hard inquiry required to apply for a new loan, plus the closure of your old loan and opening of a new one, can cause a slight and temporary dip in your credit score. If you're planning to apply for other credit soon, like a mortgage or credit card, this timing could be important. That said, some lenders, like Sunward, allow you to get pre-qualified for an auto loan with no impact on your credit score.
Fees and costs: Some lenders charge fees for refinancing, including application fees, title transfer fees, lien recording fees, and prepayment penalties on your existing loan. These costs can eat into or even outweigh the savings from a lower interest rate.
Longer loan term: While extending your loan term can reduce monthly payments, it also means you may end up paying more in total interest over the life of the loan. In some cases, this could lead to negative equity, where you owe more on your car than it’s worth.
Loss of original loan benefits: If your current loan includes perks like a lower payoff amount for early payment or built-in protection plans, refinancing could nullify those benefits.
Real-World Scenario
Let’s say Sarah took out a 60-month auto loan two years ago with a 6.5% interest rate and a monthly payment of $450. Since then, she’s worked hard to improve her credit and has raised her score by 85 points. Now that her credit profile is stronger, she qualifies to refinance at a 3.9% interest rate.
By refinancing the remaining balance into a new 36-month loan, Sarah lowers her monthly payment to $385—a savings of $65 per month. Over the remainder of the loan, she’ll save more than $2,300 in total interest.
There was a small dip in her credit score—about 7 points—when she applied. But that drop recovered within three months. In fact, with her new lower monthly payment and consistent on-time payments, her credit score continued to improve beyond where it was before refinancing.
Can Refinancing a Car Raise Your Credit Score?
While refinancing initially causes a slight drop in your credit score, it can actually improve your score over time in several ways:
Lower utilization ratio: If refinancing reduces your monthly payment, the portion of your income going toward debt decreases, which can positively impact your credit utilization.
Payment history boost: Each on-time payment on your new loan adds to your positive payment history, which accounts for 35% of your FICO score.
Debt management: Lower payments might help you avoid missed payments on other obligations, protecting your overall credit profile.
When managed responsibly, your new auto loan could become a positive factor in your credit history as you build a record of consistent payments.
How Long Does the Credit Impact Last?
The credit effects of refinancing are often short-lived. Most borrowers see their scores stabilize relatively quickly after the initial change appears on their credit report.
Within the first month or two, it’s common for your score to begin trending upward again, especially if you’re keeping up with payments on your new loan. As the months go on, those positive behaviors continue to strengthen your credit profile.
By the 6-month mark, many borrowers find that any early impact has not only leveled out, but their score may actually be higher than it was before refinancing. Staying consistent with payments and avoiding additional hard inquiries during this time can help accelerate that recovery.
When Does It Make Sense to Refinance Your Car?
Refinancing makes the most sense when:
Interest rates have dropped significantly since you took out your original loan
Your credit score has improved, potentially qualifying you for better rates
You're struggling with your current payment and need to extend the term
You initially financed through a dealership and can now secure a better rate
However, refinancing might not be worth it if you're almost done paying off your current loan or if your car has significantly depreciated, as lenders may be reluctant to refinance a vehicle that's worth less than the loan balance.
Mistakes to Avoid When Refinancing
To protect your credit and ensure refinancing delivers the desired benefits, avoid these common missteps that have the greatest potential to negatively impact your credit score:
Refinancing too frequently: Every time you apply for a loan, a hard inquiry is recorded on your credit report. One or two inquiries won’t do much harm, but multiple inquiries in a short time can add up and lower your score.
Not checking your credit score first: Applying without reviewing your credit may lead to unnecessary denials or high-interest offers. Catching and correcting inaccuracies ahead of time can prevent avoidable damage to your score.
Missing a payment during the transition: Timing gaps between loan payoff and new loan setup can result in a missed payment, which is one of the most damaging things for your credit score. Always continue making payments until the refinance is fully complete.
Failing to shop around properly: Rate shopping can be done safely, as long as it happens within a 14- to 45-day window. Stretched out too long, though, shopping around will trigger separate inquiries that chip away at your score.
Refinancing while upside down on your loan: If your loan balance exceeds your car’s value, lenders may deny your application or offer poor terms. Taking on additional debt in this scenario may also raise your credit utilization and hurt your score if you struggle to keep up.
FAQs
Can refinancing a car hurt your credit score permanently?
No, the impact of refinancing on your credit is typically temporary. With responsible management of your new loan, your score should recover within a few months.
How much does refinancing lower your credit score?
Most borrowers see a temporary drop of 5-10 points, though this varies based on your credit profile and the number of applications submitted.
Is it bad to refinance a car multiple times?
Frequent refinancing can hurt your credit through multiple hard inquiries and by repeatedly reducing the average age of your accounts. It's generally best to wait at least 6-12 months between refinances.
Can refinancing help if you're upside down on a car loan?
If you owe more than your car is worth, refinancing can be challenging. However, some lenders offer special programs for underwater loans, especially if your credit is strong.
What happens if I apply to refinance and get denied?
If your refinancing application is denied, the lender will typically notify you of the reason. Common reasons include a low credit score, a high loan-to-value ratio, or the vehicle not meeting the lender's criteria. You can ask the lender what needs to improve and try again after making changes.
Will my current lender know I’m shopping around for refinancing?
Not necessarily. Credit inquiries during rate shopping don’t automatically notify your current lender. However, once you apply and initiate a new loan payoff, your original lender will be informed as part of the refinancing process.
Does refinancing affect my ability to get other types of credit?
In the short term, it might. A temporary dip in your credit score could slightly affect your approval odds or the terms of a new loan or credit card. But if refinancing improves your overall debt profile and you continue making on-time payments, your score may actually improve, boosting your creditworthiness.
Can I refinance if I still owe a lot on my car loan?
Yes, you can refinance even if you still owe a significant amount. Just make sure the value of your car is close to or above your loan balance to improve your odds of approval and secure favorable terms.
Can I refinance a car that I’m leasing?
No, traditional refinancing applies to financed vehicles, not leases. However, some lenders offer lease buyout loans, which allow you to purchase the vehicle at the end of your lease and then refinance that new auto loan if needed.
While refinancing a car does temporarily hurt your credit score, the impact is typically minor and short-lived. For many borrowers, the financial benefits of a lower interest rate or reduced monthly payment outweigh the brief credit score dip.
By understanding how refinancing affects your credit and following the best practices outlined above, you can make a well-informed decision that supports both your immediate financial needs and long-term credit health.
Ready to explore your auto refinance options? Sunward offers competitive rates and a streamlined application process to help you save money on your car loan without unnecessary stress on your credit score. Learn more now.
