Do you currently have an auto loan? Would you like to lower the amount you pay each month for your vehicle? If there were a way to refinance your car loan to use the money you save to pay off other debt, invest, or buy items you can’t afford right now, would you consider choosing an alternative solution?
There are several factors to consider to decide whether auto loan refinancing can be beneficial for you. Among the things you need to think about is how refinancing your vehicle might affect your credit score.
Definition of Refinancing
Refinancing is defined as taking out a new loan to pay off an old one. The reason that borrowers may decide to refinance is that it can lower their monthly payments. There are several reasons that this might happen:
• Interest rates have gone down since the initial loan got issued
• The borrower’s credit rating has improved. This means they will qualify for a lower interest rate
• Several loans are consolidated to create a single payment that may save them money
Can refinancing your auto loan lower your credit score?
Every time you apply for a loan or refinance a loan, potential lenders evaluate whether or not you are a reasonable risk by running a credit check. Banks look at factors like your total debt load and your payment history.
Most lending institutions run something called a hard credit check, which could lower your credit score by as much as 5 points.
When you refinance your current car loan, it will close out that account, lowering your credit score. This is because FICO (Fair Isaac Corporation) creates an average based on the length of time you’ve held your accounts. The longer you’ve held an account, the more it will affect your credit score, though if you’ve made all payments on time, it minimizes the adverse effects of closing that account.
What is FICO?
FICO scores are how lenders assess a borrower’s credit risk. Five areas are evaluated:
– Payment history
– Current debt level
– The types of credit the borrower has used
– The length of their credit history
– New credit accounts.
Should you refinance your auto loan?
There are certain times it makes sense to refinance a loan. For example, if you bought your car straight out of school, you probably had a limited credit history. Hopefully, as you’ve been working and paying bills (including debt payments), your credit score has improved, and your credit history provides lenders with a track record that shows you are a good credit risk.
Another reason to refinance is that interest rates have fallen since you initially took out the loan. For most people, as long as you continue to make payments on time, your credit rating should be back to normal in a few months, so there won’t be any long-term effects. Therefore, it often makes sense to refinance student loans.
For those seeking the most competitive rates, Lantern by SoFi is an excellent site as it will allow you to find the best options easily.
