Does Refinancing an Auto Loan Hurt Your Credit Score?

Auto loan refinancing can be a smart financial move that saves you hundreds or even thousands of dollars over the life of your loan. However, many borrowers worry about the impact on their credit score. The short answer: refinancing may cause a small, temporary dip in your credit score, but the long-term benefits often far outweigh this minor effect.

Check your auto refinance rates now and see how much you could save with better loan terms.

How Auto Loan Refinancing Affects Your Credit Score

When you apply to refinance your auto loan, lenders could perform a hard inquiry (also called a hard pull) on your credit report to assess your creditworthiness. This hard inquiry typically causes your credit score to drop by 2-5 points temporarily.

The good news is that credit scoring models recognize when consumers are rate shopping for the same type of loan. If you submit multiple auto refinance applications within a 14-45 day window, most scoring models treat them as a single inquiry, minimizing the impact on your credit score.

While refinancing may temporarily lower your credit score by a few points, the financial benefits typically outweigh this short-term effect.

Why Your Credit Score Might Drop When Refinancing

Hard Credit Inquiries: Each application triggers a hard pull, which can lower your score by a few points. However, this impact diminishes over time and disappears completely after two years.

Average Account Age: Opening a new loan account reduces the average age of your credit accounts, which can slightly impact your score. Credit history length accounts for about 15% of your FICO score.

Credit Mix Changes: Closing your old auto loan and opening a new one changes your credit mix, though this typically has minimal impact since you're replacing one installment loan with another.

Long-Term Credit Benefits of Auto Loan Refinancing

While refinancing might cause a small initial dip, it can actually improve your credit score over time through several mechanisms:

Lower Credit Utilization: If refinancing reduces your monthly payment, you'll have more available income, potentially reducing reliance on credit cards and lowering your overall credit utilization ratio.

Consistent Payment History: Making on-time payments on your new, potentially more affordable loan helps build positive payment history, which comprises 35% of your credit score.

Debt-to-Income Improvement: Lower monthly payments improve your debt-to-income ratio, making you more attractive to future lenders.

When Auto Loan Refinancing Makes Financial Sense

Consider refinancing your auto loan if you meet any of these criteria:

Your Credit Score Has Improved: If your credit score has increased by 50+ points since you obtained your original loan, you likely qualify for better interest rates. Even a 1-2% rate reduction can save significant money.

Interest Rates Have Dropped: Market interest rates fluctuate based on economic conditions. If rates have decreased since you financed your vehicle, refinancing could lower your costs.

Your Financial Situation Has Changed: Whether you need lower monthly payments due to financial hardship or want to pay off your loan faster with higher payments, refinancing can adjust your terms.

You Have Substantial Time Left: Refinancing works best when you have at least two years remaining on your current loan, giving you time to recoup any fees associated with the new loan.

How to Minimize Credit Score Impact When Refinancing

Shop Within a Short Window: Submit all your refinance applications within a 14-45 day period to ensure they're counted as a single inquiry.

Check Your Credit First: Know your credit score before applying so you can target lenders who work with borrowers in your credit range.

Get Pre-qualified: Many lenders offer pre-qualification with soft credit pulls that don't affect your score, helping you compare options before formal applications.

Continue Making Current Payments: Don't miss any payments on your existing loan during the refinancing process.

Calculating Your Potential Savings

Before refinancing, calculate whether the savings justify any temporary credit score impact. Use our auto payment calculator to estimate your new monthly payments and total interest costs.

Consider factors like remaining loan balance, current interest rate, new potential rate, remaining loan term, and any refinancing fees. Even a 1% rate reduction on a $20,000 loan balance can save you over $1,000 in interest over five years.

Frequently Asked Questions About Auto Loan Refinancing and Credit

How long does the credit score impact last? Hard inquiries typically affect your score for 6-12 months, with the impact diminishing over time. The inquiry remains on your credit report for two years but stops affecting your score after one year.

Can I refinance if I have bad credit? Yes, though options may be limited. Some lenders specialize in refinancing for borrowers with poor credit, though rates may not be as favorable.

How soon can I refinance after getting my original loan? Most lenders require you to wait at least 60-90 days after your original loan before refinancing, though some may have longer waiting periods.

Will refinancing restart my loan term? You can choose your new loan term when refinancing. You might extend the term for lower payments or shorten it to pay off debt faster.

Take Action on Your Auto Loan Refinancing

The temporary credit score impact of auto loan refinancing shouldn't prevent you from potentially saving thousands of dollars. With proper timing and strategy, you can minimize any negative effects while maximizing your financial benefits.

Ready to explore your options? Compare auto refinance rates from multiple lenders and discover how much you could save. Our process is quick, free, and designed to help you make the best financial decision for your situation.