If you have ever thought about refinancing your car loan, you most likely thought about how this will affect your financial situation. Many people who care about their credit history also wonder if such a procedure will harm their credit score.
Why do people think about refinancing
There are several reasons to contact the bank for the provision of such a service. The most frequent are two, this is a decrease in interest and a decrease in monthly payments. In this case, the first option is the most in demand. The fact is that many people get a car loan at the car dealership where they chose a car. Such a loan, as a rule, has a not very favorable interest rate.
The increased rate is due to the fact that in most cases the dealer also acquires a car on credit, in order to sell it to you later. Or he simply lends funds to carry out his activities, as a result of which, you have the opportunity to buy the car of your dreams. But this interest rate can be reduced.
How is refinancing going?
The process for the borrower is quite simple. After you apply for a rate change, the bank will check your credit. If the rate was greater than the established rate, the percentage will be reduced. The bank buys the car from the dealer, he gets the amount of the purchase immediately, even less than he would have received from you, but immediately. And until you pay the full amount of the loan, the car will belong to the new lender.
Will it affect credit history?
While refinancing a car probably won’t improve your CI, it shouldn’t make it worse. Most of the basic credit scoring models take into account the following estimates:
- Payment history (35%)
- Debt amounts (30%)
- Age of credit history (15%)
- What loan was taken after (10%)
- What loans were taken in the entire history (10%)
When you apply for a car loan, the lender makes a request for your credit history. Such a request will be called a “hard request” and will adversely affect the overall score. A drop in the score may be insignificant and should be neutralized within two to three months. Refinancing can also have a negative impact on your CI because you are applying for a new loan. But at the same time, your old one is closing. Here it is important to compare how the conditions on the loan have changed, how much you managed to pay in the old way and, of course, have you not made any overdue loans.
Closing a loan can reduce your loan history, but if you have other open loans, this will not be a problem. And the break will not be too long (between closing the old loan and opening a new one), therefore this period in time may and will not be recorded in your credit report.
By the way, speaking of the conduct of the old loan. The new lender will definitely learn how you deal with exactly the loan you want to refinance. Therefore, even if you understood from the very beginning that you agreed to unfavorable conditions, do not rush to run to another bank. In order to get approval, and even more favorable conditions under the contract, it will be necessary for at least half a year to make payments and other obligations under the current loan agreement.
After you have brought a loan in the best form, ask for refinancing. If you are refused – wait a few months before re-submitting the application, so as not to worsen the credit history with frequent requests for a loan.
Should I refinance car loans?
Even if your credit report deteriorates due to new requests for a loan, this drop in the score should be insignificant and will recover in the coming months. If, of course, you will not perform other actions that could adversely affect the overall score.
If you do not plan to take a large loan in the near future, for example, a mortgage or another car loan, the decline in the total credit score should not stop you before refinancing, with which you can save home money.