Does refinancing a car hurt your credit score?

Before deciding to refinance your vehicle, it’s important to understand how it may affect your credit score. Let’s take a closer look at how refinancing a car loan impacts your credit. 

Will refinancing your auto loan hurt your credit score? 

Yes, refinancing an auto loan may hurt your credit score. When you refinance a vehicle, you’re applying for a new auto loan, then using that loan to pay down your existing car loan. During the application process, the lender will check your credit reports, resulting in a hard credit pull.^[1]

Some lenders, like LendingClub, offer pre-qualification to check your rates first, which shows up as a soft pull rather than a hard pull on your credit report.

How much will your credit score decrease if you refinance? 

Your credit score may decrease after a hard credit check when you refinance an auto loan. However, it could go down even more if you’re applying for additional credit over a short time.^[1] If you’re applying for auto refinance loans, you may want to reconsider whether applying for additional credit like a credit card or mortgage makes sense.   

When you refinance your auto loan, the age of your accounts—or the length of your credit history—goes down. Fortunately, this credit scoring factor only makes up 15% of your score so your score may be impacted accordingly. Loans that are reported as “new” to the credit bureaus also signal that you’ve taken on more debt, which could lower your score.^[2]   

Your credit mix, or the different types of accounts on your credit report, may not change much since you’re replacing one auto loan with another.^[2] 

How long will it take for my credit score to recover? 

According to Experian, hard inquiries from the application process can stay on your credit report for up to two years, but generally the impact on your score only lasts about a year.^[3] 

When refinancing your car loan might make sense 

Refinancing your auto loan can offer many benefits, like lower interest rates or a longer loan term. However the timing may not always be right, depending on your financial situation and other factors. Here’s a closer look at when refinancing your car loan might make sense.  

1. You got the loan from the dealership 

If you got your original loan from the car dealer, you may not have received the best rate possible. A dealership is typically an intermediary between the buyer and the auto lender, and the dealer may mark up the interest rate to compensate for their involvement.^[4] You may be able to get a better rate by refinancing directly with an online lender, credit union, or other financial institution. 

2. Your credit has improved 

If your credit score has increased since you first took out the loan, and you’ve been making on-time payments on your original loan for at least a few months, you may qualify for a lower interest rate through refinancing.^[5]  

3. Interest rates have gone down 

Interest rates fluctuate often. If interest rates have decreased since you first took out your loan, you may be able to take advantage of lower rates. Rate shopping without a hard credit check can help you determine whether you qualify for a lower rate. Credit scoring systems such as the FICO® and VantageScore® have built-in accommodations for rate shopping on installment loans. They treat inquiries related to multiple loan applications as a single event, as long as all applications are for the same loan amount and are submitted within a 14-day window.^[6]

4. You need a lower car payment 

Even if you’re unable to lower your interest rate, refinancing can still help you get a lower monthly payment. You’ll refinance a lower balance than what you started with, which shrinks your monthly payments. Refinancing into a longer term may also lower your monthly payments because they’re spread over more months. This can free up cash for other monthly expenses. Just keep in mind that this strategy can result in a higher total interest cost over the life of the loan. 

When an auto refinance loan might not make sense 

Refinancing can come with a number of benefits, but it’s not always the right move. Here’s a look at common reasons when an auto refinance loan might not make sense.  

1. Your loan is almost paid off 

If you don’t have much time left on your loan, lenders likely won’t want to refinance your loan. LendingClub Bank, for example, requires at least 24 months left on the loan term to consider a refinance loan. 

2. Your loan is underwater 

Being upside-down or underwater on your auto loan means the repayment amount on your loan is more than the car is worth. While it can be possible to refinance an underwater loan, it typically comes with high interest rates and unfavorable terms.^[7] 

3. The prepayment penalty is too high 

Since the new lender is paying off your old loan early, you may be subject to prepayment penalties in the process. Check with your original lender to see what fees you may incur, then compare it with your potential savings to make sure it’s worth it.^[8] 

Can you refinance an auto loan with poor credit? 

Yes, you can refinance an auto loan with poor credit. While it’s generally better to refinance when your credit is in good shape, it may be possible to refinance a car loan even with bad credit. However, you’ll likely pay a higher interest rate as your credit score decreases. Instead, you might consider working to improve your credit score before you try to refinance your auto loan.^[9]  

How to get started with the auto refinancing process 

Refinancing your auto loan is a straightforward process, but it's important to understand what’s involved before you get started. Here are a few pointers to keep in mind.   

• Determine if refinancing makes sense for you. Consider current interest rates, whether your credit score has improved, and other factors that may make it a good time to refinance or require you to wait. Be sure to also assess your car’s value to make sure you’re not upside-down on your existing loan. 

• Shop around. Many lenders will let you prequalify without a hard inquiry to your credit score. If you choose to complete the application, be sure to have all your documents in order, like your car’s vehicle identification number (VIN), existing loan’s payoff amount, and your Social Security number. Try to compare offers within a short period of time—usually no more than two weeks—to minimize the impact on your credit score.^[6]  

• Evaluate loan offers. Compare refinancing offers from different lenders to your existing loan to see how your financial situation will be impacted. Calculate how much you could save over the life of the loan, how much you could lower your monthly payment, and how quickly you could pay down the loan. With this knowledge in hand, you can confidently decide which refinancing offer will help you accomplish your financial goals.^[9] 

The bottom line 

Is refinancing a car bad for your credit? It may impact your score, but as long as you make your monthly payments on time, your score should recover. Unless you’re planning to take out a large new loan in the very near future—for example, a mortgage—don’t let a short-term, small drop in your credit score keep you from refinancing your auto loan and saving money.

If you didn’t shop around for your current auto loan, your credit score has improved, or interest rates have decreased since you took out your initial car loan, it’s likely worth looking into refinancing options.    

1. Consumer Financial Protection Bureau. “What’s a credit inquiry?

2. myFICO. “What's in my FICO Scores?”

3. Experian. “What’s the Difference Between a Hard and Soft Inquiry?”

4. Consumer Financial Protection Bureau. "What are the different ways to buy or finance a car or vehicle?"

5. Experian. "How soon can you refinance a car?"

6. Experian. “What is rate shopping?”

7. Federal Trade Commission Consumer Advice. “Auto Trade-Ins and Negative Equity: When You Owe More than Your Car is Worth”

8. Consumer Financial Protection Bureau. “Can I prepay my loan at any time without penalty?”

9. Consumer Financial Protection Bureau. “What should I know before I shop for a car or auto loan?”