When you refinance an auto loan, a lender closes the original loan account and opens a new account. Therefore, a refinanced loan will cause a few changes in your credit report, but those changes usually have a small impact on your credit score. You may be able to avoid refinancing altogether if your lender is willing to change your loan terms without requiring you to refinance.
Inquiries
The lender that reviews your application to refinance your car will check your credit. That check results in a notation on your credit report that the credit industry refers to as an inquiry. One inquiry on your report should have a small effect on your credit score, according to the Fair Isaac Corporation. The company created the FICO score, and Fair Isaac indicates that one inquiry would reduce your FICO score by less than five points. However, the company notes that inquiries can cause a bigger drop in your score if you have few credit and loan accounts, a short credit history or several other inquiries on your report.
Account Age
A refinanced auto loan would show a new opening date for your account, because the original account will no longer be active. The age of a credit or loan account affects 10 percent of your FICO score. The longer you've held an account in good standing, the better it is for your score. Therefore, having a refinanced account for your car on your credit report may slightly lower your score, especially if most of your other accounts are new too.
Loan Modification
Ask your lender to consider modifying your loan instead of refinancing it. You could get a lower interest rate if the lender just changes the loan terms instead of giving you a new loan through refinancing. An inquiry could appear on your credit report anyway, because the lender would likely check your credit before modifying the loan. However, changing the terms of the original loan, instead of refinancing it, could have less of an effect on your credit score, according to Fair Isaac. You also could avoid paying refinancing fees.
Considerations
Refinancing an auto loan outweighs any potential change to your credit report if you're having trouble making your car payments. People usually refinance auto loans to reduce high monthly payments they can no longer afford. Making late payments on your auto loan, or having your car repossessed, would have a much worse impact on your credit rating than refinancing would.
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