Personal Car LoanHow Does Refinancing Your Car Loan Affect Your Credit?

How Does Refinancing Your Car Loan Affect Your Credit?

August 02, 2022

When you apply for a car loan – or refinance a car loan – your credit is of the utmost importance. Alongside other factors, such as your financial circumstances and your employment situation, your credit provides information vital to potential lenders, helping them to determine whether to approve your application – or decline it.

But, while you will need a worthy credit score to get approved for a car loan, what you may not have considered is how making that application can affect your credit in both the short and longer term.

Why Refinance your Car Loan?

Okay, so if refinancing your car loan can affect your credit, why should you bother refinancing in the first place?

There are two main reasons to refinance a car loan.

  • Get a better deal: If car loan rates have declined since you first got approved for a car loan, or your credit score has improved significantly, you may choose to refinance your car loan to get a better deal. This could allow you to pay off your car loan sooner, or enjoy lower repayments ongoing.
  • Get some breathing room: If you’re struggling to keep to your financial commitments, you may decide to refinance your car loan to either take advantage of a lower rate, or spread your loan over a longer period. While both should result in lower repayments, be aware that extending your loan term may mean you pay more in interest overall.

TIP: Your lender may charge certain fees if you exit your car loan early, especially if you have a fixed rate loan. Take these fees into account when deciding whether refinancing is the right choice for you.

In What Way does Refinancing Affect your Credit?

So, now we’ve covered why you may choose to refinance your car loan, let’s look at how doing so can affect your credit.

First and foremost, when you apply for credit – whether that’s a car loan, a home loan, a credit card, or any other form of credit – the lender will carry out a hard credit enquiry. This enquiry results in a small bump on your credit score. So, after you apply for that loan, you will likely see your credit score decrease slightly.

Aside from the number of credit applications you have made, another factor that can affect your credit score is the amount of money you have borrowed and are in the process of paying back. Obviously, as you are refinancing your car loan, this is not a new loan, so it shouldn’t affect the overall amount you are borrowing.

The last major factor to affect your credit is whether you pay on time. Making sure you pay all your credit commitments on time, each and every month, should see your credit score improve. So, if you choose to refinance because you’re struggling with your repayments, this could ensure your credit is not negatively affected, as long as you keep to your new repayment schedule.

How to Keep Harm to a Minimum

Right, so you want to refinance your car loan. What can you do to limit the harm caused to your credit?

  • Check your credit: Apply for a free credit report from each of Australia’s main credit reporting bureaus, Experian, illion and Equifax. This will allow you check each report is correct and contains no errors, and overall, to see where you stand in terms of your creditworthiness. If your credit isn’t great, you may want to hold off on refinancing to avoid rejection – and further knocks to your credit score.
  • Soft enquiries only: As you compare car loans, you will have to make enquiries regarding how much each loan option will cost you. Make sure these use ‘soft’ pulls on your credit, rather than the ‘hard’ pulls used when making a final application. Soft pulls will not affect your credit score, while each hard pull will bump your credit score down, making it harder to get approved.
  • No new credit applications: After refinancing your car loan, it would be wise to hold off on making any new credit applications for a while. This should give your credit score a chance to recover before you bump it again with a new application.
  • Be smart with your new loan: Use this new loan to continue to improve your credit. Always make your repayments on time, and stay on top of all other credit commitments.

Want to take the guesswork out of applying for or refinancing a car loan? That’s what we’re here for! At Car Loan World, we can help you in your search for a new car loan, providing you all the info you need in order to make the best choice for you.

Author

  • Roland is the founder of Credit World Pty Ltd and a leading financial expert in Australia. He has extensive knowledge on car loans in Australia. Known as a car loan expert, Roland has been featured on TV and in various publications. He started in finance comparison in 2005. Now a 17 year industry veteran.