If you’ve spent any time retail shopping, you’ve probably realized that one size does not fit all. An elastic waistband, as it turns out, isn’t the right solution for everyone. The same is true for most products and services. It doesn’t matter if you’re buying a new recliner, refinancing an auto loan, or shopping for something in between—the customized version always outperforms its generic counterparts.
Of course, you’ll only ever find that perfect fit by looking at the options and researching each one’s advantages and disadvantages. So if you’re looking to learn more about auto loan refinancing before deciding what’s right for you, check out the answers to your top questions below.
What Are the Benefits of Refinancing an Auto Loan?
Let’s say you had a pretty dismal credit score a few years ago, but you really needed a car. You bought the only option available to you: a reasonable vehicle with an outrageous interest rate.
Fast forward to the present and you’ve got a better credit score with a history of timely payments. Congratulations—you likely qualify for a more affordable interest rate!
That’s just one of many benefits of refinancing an auto loan. Here are a few others:
- Lower your monthly payments
- Improve your credit score
- Add a co-borrower
By refinancing, you take out a new loan (usually from a different lender) with new terms. So if you think you deserve a better car loan than what you currently have, refinancing might be your best choice.
That being said, there are better times to refinance than others. You probably won’t find many benefits when your credit score has taken a swan dive or when loan rates in general have risen.
When Should I Refinance My Car, Then?
You may be surprised to learn that the when’s and how’s of auto refinancing are actually much simpler than they seem. Look for one or more of these signals before looking for a new lender:
- Your car is worth more than what you owe
- US loan rates are lower now than they were when you bought your car
- Your credit has improved
- Your current lender gives you a headache
Not sure if your credit score has increased enough to warrant a new loan rate? There’s only one way to find out. Speak to a financial advisor to see if you can get better auto loan rates. They’ll help you understand the benefits of refinancing an auto loan, and even better, they’ll help you find the right time to submit your application.
Does Refinancing an Auto Loan Affect My Credit Score?
The short answer: Yes. The long answer: It depends on how you apply for and pay off your new auto loan.
When you get a loan of any kind, your credit score will change based on two factors: credit inquiries and your payments.
Think of a hard credit inquiry as the monster in your closet: it may seem dangerous, but once you shine a light on it, you’ll see that its intimidating shadow was just a pile of odds and ends.
People tell horror stories about credit inquiries all the time, but there’s rarely any truth to them. Here’s what you need to know.
A credit inquiry is a necessary step to obtaining a loan. Lenders pull your credit history to make sure you have a history of making timely payments. Any adult with a mortgage, rental contract, or car loan allowed their lender or landlord to pull their credit before entering into an official agreement.
There are two types of credit inquiries. You’ll encounter two different types in your life: hard pulls and soft pulls. A hard pull is documented on your credit report for two years and usually decreases your credit score by a few points. These often happen sometime in the application process for a loan.
A soft pull, on the other hand, does not affect your credit score. If you’ve ever checked your credit score through a third-party site like Credit Karma, you’ve let them use a soft pull to gather basic information from your credit report. Lenders usually can’t see your history of soft pulls.
Though credit inquiries affect your credit score temporarily, your loan payments will have a more lasting impact.
When you refinance your auto loan, you take out a new car loan. How you pay that new car loan determines how it affects your credit.
When you consistently make your monthly payments on time, your credit score increases. When you skip or postpone payments, your score decreases. It’s as simple as that.
How Do I Start?
There are a number of ways to refinance your car. First thing’s first: You have to find a lender willing to offer you better financing.
If you already have a lender you trust, give them a call to see what they can do. It’s worth noting that you usually won’t be able to refinance through the same lender that gave you your original loan.
Don’t know how to pick a lender? There are a number of auto finance companies that can help. Look for one that lets you pre-qualify for car loans—which means they’ll give you a variety of offers from different lenders before asking for a hard credit inquiry.
After that, it’s as easy as choosing the one that best fits you. With these tools in your hand, you can be confident that you’ll find a customized solution to your financial needs instead of a one-size-fits-all approach.