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Auto Loans

Does Refinancing an Auto Loan Hurt Your Credit?

Updated Apr 06, 2023   |   4-min read

Looking for ways to lower monthly payments? Refinancing your auto loan can save you money with lower interest rates and payments. It may cause a temporary five- to 10-point dip in your credit score, but the drop only lasts a few months with proper management.

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How refinancing your car loan can hurt your credit score

After you apply for a new loan and get pre-approved, the next step is for your lender to conduct a hard credit inquiry. This means, with your permission, they check your credit report and use it to determine your creditworthiness and finalize interest rates. 

Usually, multiple hard credit inquiries within a short time frame can lower your credit score, as it tells creditors you may be borrowing too much and could potentially be unable to meet monthly payment obligations. 

However, auto loans are part of a “rate shopping” exception where you’re allowed multiple hard credit inquiries to hit your credit report in a short time frame. Within this window, all hard credit inquiries get combined and counted as one single inquiry. FICO offers a 45-day rate shopping window, whereas VantageScore has a 14-day rolling window.

Once you accept a new auto loan, you will see a five- to 10-point drop in your credit score. This is based on both the hard inquiry and the new debt obligation. Your score should bounce back after a few months of on-time loan payments and no further credit inquiries.

How pre-qualifying can help make sure you don’t unnecessarily hurt your credit

When it comes to refinancing an auto loan, it’s a borrowers market. Shopping around will allow you to get lower interest rates and protect your credit.

Before dealing with a hard credit pull, borrowers can check their rates and qualification status by submitting a short pre-approval application to any lender. This is done by using a soft credit pull—a basic inquiry where a lender checks your credit. It’s the same as when you check your own credit score and has no impact on your credit score or report.

You can get pre-approved for as many auto loans as you want and it won’t hurt your credit. By doing this, you can ensure that you’re getting the lowest rate before following through with the full application process and putting a dent in your credit score with a hard inquiry.

If you’re unhappy with your pre-approval refinancing rates, consider taking a few months and trying to raise your credit score. Ultimately, a higher credit score will help you qualify for a better interest rate.

Other tips for reducing the impact on your credit score

No matter what you do, refinancing a car loan and taking on new debt will affect your credit score. Still, there are ways you can limit the impact it has. 

  • Know your credit score going into the process. This can help you know if you are likely to be eligible for refinancing before you start shopping around.
  • Avoid applying for other forms of credit soon before or after applying for an auto loan. Your credit score will be lowered even more if you apply for a credit card or mortgage too soon before auto loan refinancing. It can also affect your rates adversely if you apply for another form of credit too soon after refinancing. 
  • Keep your credit in good standing. By making on-time monthly payments and not increasing your overall debt, you can maintain—and even improve—your score and lessen the chance that you’ll be rejected by a lender after a hard credit pull. 

Next steps

Now you have a better idea of how refinancing your car can hurt your credit, but what comes next?