Can Refinancing a Car Hurt Your Credit Score?

Austin KilhamUpdated February 10, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Refinancing your vehicle will likely cause a dip in your credit score. That’s because the application process usually involves a hard credit inquiry, which will temporarily lower your score. Additionally, accepting a loan can lead to another drop, as borrowers are statistically more likely to miss payments when they first take on a new debt. That said, refinancing can offer big advantages, including lowering the cost of your loan over time and making your monthly payments more manageable. Depending on your situation, these benefits may be worth it — even if refinancing a car does hurt your credit.

What Is Auto Loan Refinancing?

Auto loan refinancing involves taking out a new loan to pay off the balance on your original auto loan. Once you’ve applied for a new loan and your application is accepted, your new lender will take possession of the title of your vehicle. You’ll then begin making regular payments to the new lender. In some cases, you may refinance with your original lender.There are both pros and cons of refinancing a car. Ideally, the new loan will offer a lower interest rate or lower monthly payments. However, you may also be on the hook for fees. Lenders charge fees for issuing a new loan, which can eat into whatever savings the new loan offers. Make sure these costs don’t outweigh potential savings.As far as when to refinance a car, there are a few scenarios when it might make sense: if interest rates drop, your financial situation improves, or you’re looking for ways to lower your monthly payments.If interest rates drop or your credit score improves, you may be able to qualify for a loan with a lower interest rate than your current loan. Paying less in interest will reduce the cost of borrowing over the life of the loan. You may also choose to refinance to a loan with a longer term. This can reduce the amount of your monthly payment. However, a longer term means you’ll pay interest for longer, which can ultimately make your loan more expensive.Recommended: What Credit Score Do You Need to Refinance a Car?

Can Refinancing a Car Lower Your Credit Score?

Refinancing an auto loan can hurt your credit score. One reason for this is because when you apply for credit with any lender, they’ll request a hard inquiry into your credit. This inquiry remains on your report for two years at most. Your credit score should recover once you prove you can handle paying off your new debt on time.You might see an additional dip in your credit score once you take on the new debt. This is because studies show that borrowers who take on new debt are more likely to default on their loan. However, the effects on your credit score will likely be minimal since you’re replacing one loan with another of the same size. And again, your score should bounce back once you demonstrate the ability to make timely payments.It’s also important to note that if you’re shopping around for a loan (which is advisable), you don’t need to worry about getting hit with multiple hard inquiries. Credit score companies don’t want to deter borrowers from shopping around for the best loan, so they count multiple hard inquiries made over the course of a few weeks as one.

Factors That May Affect Your Credit Score

Hard inquiries aren’t the only thing that can affect your credit score. Consider the FICO score, one of the most common credit scoring systems in the U.S. It uses the following five factors to calculate your score:

Your payment history: This is the most important factor, accounting for 35% of your FICO score. Lenders want to know that you have a track record of paying your bills on time. This helps them determine how risky offering a loan may be.
The amount you owe: As the second biggest factor, this comprises 30% of your credit score. If you’re using a high portion of your available credit, lenders may see you as potentially overextended, putting you at higher risk of default.
Length of credit history: This factor makes up 15% of your FICO score. FICO looks at how long you’ve had your credit accounts, as well as the last time you used them. In general, the longer your credit history, the better the effect on your score.
Your credit mix: Generally speaking, FICO likes to see you have a mix of credit, such as credit cards, installment loans, and mortgages. This accounts for 10% of your credit score calculation.
New credit: This factor also makes up 10% of your score. New credit, as mentioned above, can be a red flag to lenders who might worry it puts borrowers at greater risk of default.

Can Refinancing a Car Help Your Credit?

If refinancing your loan can help ensure that you’re able to make your payments on time and in full, it can serve as a preventative measure to help protect your credit score. This is because missing loan payments will have a big impact on your payment history, which will hurt your credit score.Remember that refinancing to a loan with a longer term can help reduce your monthly payments. This can result in monthly payments that are more affordable for you, making it less likely that you’ll miss one. Recommended: How Many Times Can You Refinance a Car?

When You May Not Want to Refinance an Auto Loan

Refinancing your auto loan isn’t always appropriate. There are certain situations in which you might consider opting against refinancing, such as:

If interest rates have risen since you took out your initial loan: In this scenario, it may be very difficult to find a new loan with a better rate. This may be true even if your credit score has improved.
If your car is worth less than the amount you still owe: If you’re in this situation, your loan is what’s known as “under water.” Lenders may be hesitant to extend credit since if you default on your loan, they’ll be unable to recoup their losses by repossessing and selling your vehicle.
If you’ve already paid off most of your loan: In this case, refinancing may not make much sense, as the cost of fees can offset the potential savings.
If you’re planning to apply for another major loan soon: Remember that new credit will depress your credit score. So think ahead to whether or not you’ll be applying for another major loan in the near future, such as a mortgage. If so, you may want to put off refinancing until you’ve secured that loan at the best rate possible.

Refinancing Your Auto Loan With Lantern

It’s important to shop around for the refinancing option that’s best for you, whether that’s one with the lowest interest rates or more advantageous terms. And don’t feel bad about applying for multiple loans in the span of a few weeks — as mentioned, it won’t hurt your credit score since it will get counted as a single inquiry.If you think auto loan refinancing makes sense for you, Lantern by SoFi makes it easy to compare refinancing rates from top lenders and get prequalified for loans. Plus, when you choose a loan, Lantern will work with its partners to pay off the old loan and retitle the car.Compare auto loan refinancing rates today with Lantern by SoFi!

Frequently Asked Questions

How does refinancing a car affect your credit score?

Why did my credit score go down when I refinanced my car?

Does paying off a car loan affect your credit?

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About the Author

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.

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