Consumers refinance cars for various reasons, according to Edmunds.com editor Philip Reed. For example, you may want to refinance a high interest loan because your credit score now qualifies you for better terms. You may have discovered that your dealer-arranged financing is above market rates. You may have signed up for a short repayment term, but your financial picture changed and you need smaller payments. Be aware that loan refinancing affects your credit score.
Loan Applications
Banks and other financial companies order your credit information from at least one of the major credit bureaus when you apply for loans. This credit review is called a "hard inquiry," according to The Fair Isaac scoring company's MyFICO website. A single inquiry may have no effect, but additional credit checks may pull down your credit score by as much as five points each. This does not hurt you if you have a comfortably high score, but it can push you down to a sub prime level if your score is borderline.
Loan Shopping
Loan shopping often means filling out a number of applications within a relative short time frame. All of these hard inquiries pop up on your Experian, Equifax and TransUnion credit reports. Multiple credit checks by lenders look very bad on your records because statistics show that you are eight times more prone to file bankruptcy if your credit files show six or more hard inquiries, according to the MyFICO site. Avoid the damage by confining your rating shopping to a two-week period, as scorers will recognize what you are doing and view them as a single credit check.
Payment History
Companies that finance car loans usually report your payment performance to the Experian, Equifax and TransUnion credit bureaus. The MyFICO site considers on-time payments and delinquencies in its credit score calculations, where they make up 35 percent of your score. Your refinanced car loan will raise your score if never miss a payment deadline. Car loans also add variety to your credit use, which supports a good credit rating. MSN Money writer Liz Pulliam Weston explains that you need a mix of revolving accounts and installment loans to maximize your score.
Considerations
Your car payments drop if your new loan runs the same length as your previous financing, according to Tara Baukus Mello of Bankrate.com. For example, if you refinance a five-year car loan after making two years of payments and get a new five-year loan, the payment goes down because your balance is lower than what you financed originally and you are paying less interest. This helps if money is tight, but it is better to get a loan for the shortest possible term to avoid owing more than your car is worth for an extended period.
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