What Impact Will Pulling My Credit Report Have When I Refinance a Car Loan?
Refinancing a car loan is a great way to take control of your finances. You can achieve significant savings benefits from car loan refinancing that will allow you to infuse additional cash into your monthly budget, pay off higher interest debts, or save money more aggressively. This savings can potentially come in several ways:
- Lower total value of the lifetime of your loan – By lowering your interest rate during the car loan refinance process, you can reduce the total amount of money you have to pay during the lifetime of the loan since you’ll owe less money in interest.
- Lower monthly payments – A lower interest rate will typically result in lower monthly payments over the same repayment term. You can also extend the length of your repayment term when you refinance a car loan, which can lower your monthly payments. Just keep in mind that extending the repayment term may result in spending more money over the lifetime of the loan, since it will increase the amount of interest that accrues.
- Skip a monthly payment – You can often skip one to two payments when you refinance a car loan. You can use this money during the month(s) with no payment to pay down other debt or save for a major purchase.
However, it’s important to understand that refinancing a car loan may temporarily lower your credit score. In most instances, the savings benefits associated with refinancing will significantly outweigh the hit to your credit score. However, you should always factor this impact into your decision regarding whether to refinance your car loan.
Why Does Refinancing a Car Loan Lower My Credit Score
When you apply to refinance a car loan, the lender will pull your credit history. This is called a hard inquiry on your credit, and it can cause a temporary drop in your credit score. This is the primary reason why your credit score may decrease when you refinance.
There are other factors which contribute to the negative impact refinancing will have on your credit:
- Multiple hard inquiries
- Closure of existing credit accounts
- Introduction of new debt
Multiple Hard Inquiries
In order to find the most favorable loan terms, you’ll need to shop around with several different lenders. Each time you apply to refinance with a different lender, it will result in another hard inquiry on your credit.
The good news is that the major credit scoring models – FICO and VantageScore – recognize the benefits of rate shopping and treat multiple inquiries for the same type of loan as one hard inquiry as long as they occur within a short time period. However, if these applications are made in a time period longer than several weeks, you risk having multiple hard inquiries register on your credit, which may compound the negative impact on your score.
Closure of Existing Credit Accounts
When you refinance your car loan, the existing loan will be paid off and closed out. Anytime you close a long-standing credit account, it may lower your credit score slightly. However, if this loan was in good standing when it was closed out, it will minimize the negative impact. Your credit score will typically rebound from this negative hit quickly once you begin making regular payments on your new car loan.
Introduction of New Debt
Your new car loan will be viewed as new debt, and this may negatively impact your credit score. However, as you demonstrate your ability to repay this new loan, your credit score will quickly bounce back.
Hard Credit Inquiries vs. Soft Credit Inquiries
When your credit information is accessed by a legally authorized person or entity, it is called an inquiry. There are two types of credit inquiries, also referred to as credit pulls:
- Hard inquiries
- Soft inquiries
Hard Credit Inquiries
When a lender pulls your credit report in response to an application for a new home mortgage, car loan, student loan, line of credit or credit card, it is called a hard inquiry. These credit checks require your consent before the lender can access your information. Hard inquiries become part of your credit report moving forward, and anyone who pulls your credit information in the future will be able to see them.
Whenever a hard inquiry is made, it signals the potential that you will take on new debt. This will temporarily lower your credit score by a small amount until you demonstrate that you can successfully pay off the new debt. Hard inquiries can remain on your credit history for up to two years, but the negative impact to your credit score usually rebounds within a few months as long as you make your new loan payments on time. In most instances, the credit scoring models will stop counting hard inquiries in their calculations after a year.
Due to the potential negative impacts on your credit score, it’s best to limit hard credit inquiries. Avoid applying for credit cards on impulse, and only apply for new sources of credit when you actually need them. If you have excellent credit, the slight drop in your score most likely won’t matter much. But if your credit score isn’t great, the drop in your score caused by hard pulls can result in significantly higher interest rates on a new loan or potentially impact your ability to get approved.
Soft Credit Inquiries
Soft inquiries occur when your credit report is pulled for purposes unrelated to receiving a loan. There may be several reasons why you experience a soft credit inquiry:
- Credit card companies may check your credit to see if you qualify for a pre-approved application offer
- Employers may pull your credit report as part of a background check prior to hiring you
- You may trigger a soft inquiry if you request a free credit report from one of the three major credit reporting agencies (TransUnion, Equifax or Experian)
- Auto insurance companies may check your credit when setting your premiums since there is typically a strong correlation between high credit scores and safe driving habits
- Utility companies may check your credit to determine whether to require a security deposit on any equipment they lease to you
- Credit card companies with whom you already have an account may check your credit when deciding which of their other cards and products they are going to market to you
Since these soft credit inquiries aren’t used to approve a new loan, they often don’t require your consent. In addition, since they don’t indicate a greater risk of repayment (you’re not increasing your debt as result of them), they don’t lower your credit score. For this reason, you don’t have to worry about soft credit inquiries having a negative impact on your credit.
iLending Minimizes the Negative Impact on Your Credit Score
When you work with iLending to refinance your car loan, we’re able to provide you with multiple loan options without a hard credit inquiry. We accomplish this by leveraging our relationships with more than 50 nationwide lenders. Your personal loan consultant will perform a soft credit inquiry when researching loan options for you, preventing a negative impact on your credit score while you’re shopping for the best loan terms. Once you decide on the best loan for your needs, the lender offering this option will perform a hard credit inquiry. Since this is the only hard pull on your credit being made during the entire car loan refinance process, it minimizes the negative impact on your credit score.
If you try to refinance your car loan without the assistance of a company such as iLending, you’ll need to apply for each potential loan option separately when you shop for the best rates. This will result in numerous hard credit inquiries and as discussed earlier, each of these can negatively impact your credit score if the applications aren’t completed in a very tight time window.
Minimizing the negative impact on your credit score is just one of the many benefits you’ll experience when you refinance with iLending. Our exclusive You First Approach™ makes refinancing a car loan easy and hassle free:
- You’ll be paired with a personal loan consultant who will assist you throughout the entire process
- After discussing your refinance goals with you in detail, your personal loan consultant will shop for the best loan terms aligned with your goals by working with our extensive network of nationwide and local lenders
- You’ll have the opportunity to ask your personal loan consultant as many questions as necessary to understand your options and identify the right loan for you
- Your personal loan consultant helps you complete all paperwork and makes sure all necessary tasks associated with the refinance process are completed properly
With expert guidance and assistance during every stage of the process, you’ll have peace of mind that you’re receiving the best possible loan terms and that everything will be handled correctly.
Apply now to start the car loan refinancing process.
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