If you’re looking for a way to save some money every month, you might consider refinancing some of your loans. Auto loans in particular are a great option in refinancing, allowing you to secure a lower interest rate and a lower monthly payment to keep more money in your pocket. But refinancing can sometimes impact your credit score since a hard inquiry is required for approval. Still, is it worth it to refinance your auto loan even if it does impact your credit score? We’re here to help you make a decision about refinancing your auto loan and, ultimately, improve your credit score.
How Do You Refinance Your Auto Loan?
First, it’s important to understand how to refinance your auto loan in the first place. Essentially, you’ll need to find a new loan to pay off the remaining balance on your current car loan. The new lender will be looking at how much you owe on your current loan, and the current book value of your vehicle, they will also look at your payment history and overall credit when deciding your terms. You’ll be using largely the same process that you used to get your initial loan. The good news is that you can apply to more than one direct lender, which lets you compare interest rates and make sure you’re getting the terms that work best for you. We work with a number of direct auto refinancing lenders such as OpenRoad Lending.
When you’ve decided on the right loan for you and have accepted your offer, your new lender will then get in touch with your original lender. Your new lender will obtain the “10 day payoff” and pay off your remaining balance and will take over the lien on your vehicle. Then, you’ll simply make your monthly payments to your new lender according to the new terms until everything is paid off.
Car Loan Refinancing and Your Credit Score
Refinancing your auto loan can lead to lower monthly payments, but it can sometimes have an impact on your credit score. When you first refinance, your credit score may drop slightly. Lenders have to perform a hard inquiry on your credit report to decide whether they will approve you for a loan, and these hard inquiries do cause your score to drop by a few points. You may see another small dip in your score when you accept a loan offer.
Two important aspects of your credit score are the age of your accounts and your credit utilization. When you refinance your auto loan, the age of your accounts goes down (because you’ll be paying off your original loan early), and your credit utilization goes up. Both of these factors can cause your credit score to dip temporarily. Still, keeping up with your loan will ultimately reverse this impact over time.
So, should you refinance even with a potential impact to your credit score? In short, yes. The small dip in your score typically won’t last more than a few months, especially if you’re making your payments on time, and in most cases, you will be saving on the overall finance charge you are paying on the loan. After a few months of proving that you’re reliable in your payment history, your score will go back up and could even increase beyond what it was before you refinanced. Refinancing can also be a smart move if you need to consolidate your debts or avoid repossession on your vehicle.
When Should You Refinance Your Auto Loan?
There are some situations in which refinancing your auto loan is an especially good idea. Of course, refinancing at any time could help your financial situation if you’re truly in a bind and need to cut costs.
Before you refinance, check Kelley Blue Book to get the resale value of your car. Refinancing can be tough if your car is now worth less than what you owe on it, that is called being “upside-down” or having negative equity. If your car is worth more(having equity in your vehicle) though, refinancing should be easier for you, as it incentivizes the bank to purchase your loan. You’ll also want to check on current interest rates before you refinance. If interest rates are dropping and are lower than your current rate, it may be a good time to refinance.
There are also some situations when you may not want to refinance. If you’re almost done paying on your car loan, the benefits of refinancing will likely be low. If you still need to save some money, consider extending your payment term to lower your monthly payments. Additionally, if you’re planning to apply for another big loan in the near future (such as a mortgage), you may not want to refinance your auto loan. That slight dip in your credit score can make it tough to get approved for another loan.
What to Do After You Refinance
After you’ve refinanced, the most important thing to do is keep up with your monthly payments. Being consistent and paying on your loan each month is the quickest way to boost your credit score. You’ll see your score return to normal after just a couple of months, and if you continue to pay as you should, you can even increase your score more.
Your credit score is likely to increase after refinancing because you can prove that you’re reliable with your payments. In the beginning, your lender doesn’t know whether you can pay your loan or not. Prove it, and you’ll be rewarded with an increase in your credit score.
Working with FA Financing
Refinancing your auto loan can be a great way to save some money each month while also working to rebuild your credit score. While it may be more difficult to refinance your loan if you have a low credit score, it’s certainly not impossible FA Financing has more than 20 years of experience helping San Diegans with poor credit get approved for auto loans with favorable terms for everyone involved. We can position your application in the right light to highlight your strengths and prove that you are capable of repaying your new loan. We are happy to work with clients who’ve had multiple auto loans, multiple repossessions, recent bankruptcy, or trouble proving income.
