Refinancing a car loan might seem like a great way to get a lower interest rate and save money in the long run. But, if done wrong, it can also financially hurt you.
Here’s what you need to know before you refinance your car loan.
Auto Refinancing can Lower your Credit Score
When you request an auto loan, the creditor must check your credit. As a result, a hard inquiry is noted on your credit. Unfortunately, a hard credit check might result in a temporary drop in your credit score, although the effects typically wear off within six months.
A hard inquiry is a request to look into your credit history to decide whether you’re qualified for a loan or credit card. The drop in your score is because when a hard inquiry occurs, it looks like you have applied for a new loan or line of credit, which makes you appear financially unstable.
Refinancing a car loan can also hurt your credit by reducing your accounts’ average age. That’s because, when you refinance an auto loan, the fact that you’ve taken on a new loan is noted on your credit history.
Refinancing your car may potentially damage your credit by shortening your accounts’ average age. This is because your old automobile loan will be paid off early and replaced with a new loan. However, this is a minor aspect among the many that influence your credit score.
How to Prepare to Refinance your Car Loan
Before refinancing your car loan, you should do two things to ensure that you’re in the clear. Firstly, you need to check your credit, and second, you should check your credit reports and fix any errors. Let’s expound on that a little.
Check your Credit
According to Lantern by SoFi, “a soft credit inquiry will not hurt your credit score and provides insight into how creditors evaluate you.”
What’s more, dealers may look at auto-specific credit scores, which usually have a heavier emphasis on your previous auto loan payments. However, getting an idea of where you’re at is a good indication of whether it’s time to start working on your credit.
Ensure there aren’t Errors on Your Credit Reports
Checking your credit report is a crucial step to take before refinancing because it enables you to see if there are any inaccurate references of loans, debts, or inquiries listed on it.
Although you might want to check your credit once a year, you should do this before refinancing. This way, if there is anything wrong with your credit report, you can fix them immediately and lower the risk of having issues when trying to refinance again in the future.
Fixing Errors on Your Credit Reports
Unfortunately, fixing errors on your credit reports isn’t as easy as getting a free copy of each one and sending off a quick correction form letter. Rectifying erroneous information on your credit reports could take weeks or months and is often more trouble than it’s worth because businesses tend to ignore these letters anyway.
Overall, refinancing a car loan could potentially hurt your credit score and damage your financial reputation. If you need to refinance your car loan, make sure to check your credit first and look for errors on your report. Also, ensure you only take the necessary steps to improve your scores as much as possible before attempting to refinance again in the future because this is the best way to ensure that your credit is not damaged.