Refinancing your car could help lower your monthly car payment, but does it negatively affect your credit? Credit scores are important as they significantly impact your financial dealings. If you want to refinance your car but are unsure of its effects on your credit line, then here’s what you need to know.
How to Refinance Your Car Loan?
Refinancing your car loan means taking a new loan to pay off whatever is left over from the previous loan you took from your car. The process is like taking a car loan. First, you can survey the market and apply to a few trusted lenders to determine their terms and interest rates.
Once you’ve found and accepted a loan with reasonable terms, the refinancing lender sends a notice to pay the leftover balance from your previous loan to the original lender. When this process is complete, the new lender takes over the lien, and you make payments directly to them until your loan finishes.
While refinancing your loan, you should lookout for a few critical points:
- Monthly installments: If you find it difficult to pay the monthly installments set on your original loan, you can apply for a new loan with lower monthly installments and a longer duration. This may mean you end up paying slightly more overall, but it can also give you a little breathing room with your finances every month. This is a much better option than defaulting on payments.
- The difference in interest rate: Auto loans can be expensive. So, if you do find a new loan with significantly better rates, it might be worth your while to refinance. Keep in mind that since auto loans are usually quite large, even a 1% difference in rates can save you a significant amount of money.
Does Refinancing Your Car Look Bad on Your Credit?
Just as all other types of refinancing, car refinancing does have an impact on your credit scores. There are multiple reasons for this. First, when surveying for better loan terms and applying to lenders, some hard inquiries are made that may negatively affect your credit score.
Also, accepting the new loan can also cause your credit scores to dip slightly. However, if you’re smart about how to apply for car refinancing loans and if you make uninterrupted payments, the effect of these inquiries can be negligible. It may even be neutralized entirely after a year.
It is good practice to apply your selected refinancers together quickly when applying to lenders.
Can You Refinance with Poor Credit?
Since refinancing your car loan entails replacing an existing loan with a loan with better terms, you can refinance your car loan even if you have bad credit. However, you must be regular with your payments and minimize the impact of hard inquiries on your credit line to protect your credit score.
Car refinancing can help save you a significant amount of money without causing a large dent in your credit scores if it is done correctly. If you are eligible for lower interest rates due to your high credit scores or economic conditions – and if your monthly installments are too much for you to currently take on – then your car refinancing may be a good option.