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Does Refinancing a Car Loan Lower a Credit Score?

High auto loan rates drive up the eventual purchase price of the vehicle. Buyers looking for a better deal may choose to refinance the loan and decrease the interest rate. While access to a loan refinance plan might not be challenging to find, the would-be refinance borrower may wonder if the new loan hurts their credit score. The result could be less troubling than initially believed.

Credit Scores and Loan Inquiries

Anyone who applies for credit will deal with a slightly negative short-term mark on their credit score. Lenders must perform a credit check on any potential borrower. After all, the lender needs to know whether the borrower is a high or low credit risk. Unfortunately, the resultant hard credit check affects a credit score negatively.

Credit Checks and Lowered Credit Scores

Some may wonder why a hard credit check drives down a credit score by a few points. Essentially, the hard check creates question marks about the person’s credit and financial situation. A borrower who takes out a loan might stress their finances or max out their borrowing limits. Another worry centers on whether the borrower will miss any payments. Fair or not, the unknowns surrounding the borrowing lead to a drop in the person’s credit score.

A Temporary Drop

The hard credit check inquiry will drop a credit score for a few months, but a borrower’s timely payments might help restore the pre-credit check and loan issuance drop within a few months. The original question marks whether the borrower will miss payments likely go away once the person makes those timely payments. Not paying on time might drive a lower credit score, though.

Saving Money with a Refinanced Auto Loan

After running the figures through a calculator like the Lantern refinance calculator, a borrower might focus more on the money-saving benefits of a new loan instead of an inconsequential credit score drop. A higher APR means a more expensive vehicle since the extra interest rate percentage points drive up the payoff balance. Lower the interest rate, and you lower the overall cost. The money saved can go to other expenses or into a savings account and draw interest.

Lower Monthly Payments

As the experts at Lantern by SoFi point out, “as a more qualified borrower, you may be able to get more favorable rates and terms.” Lower monthly payments could be one such benefit when refinancing. Paying a reduced monthly minimum amount might relieve stress on a person’s budget. Still, it might be wise to pay more than the minimum when hoping to pay off the loan faster.

The Soft Credit Check

When refinancing, it may be wise to ask whether the credit check is a hard or soft one. Borrowers need not worry about a soft credit check, a preliminary check intended to gain general information about the would-be refinancer. Soft checks only involve a search based on rudimentary personal information, but these checks could help the borrower and lender move forward if preferred.

Refinancing a car loan may lower a credit score temporarily. The benefits of a lower interest rate could make the short-term score drop worth it.

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