An automobile loan is a type of secured loan used to purchase a new or used vehicle. If your terms, interest rate or loan length are not the way you would prefer them to be, you can refinance the auto loan. Refinancing creates an entirely new loan with different terms, but it may also affect your credit score.
Credit Score Basics
Your credit score consists of a calculation by the Fair Isaac Company, also known as your FICO score. The company uses many different factors for your score calculation, such as length of accounts, your account balances, the diversity of your accounts and any negative credit marks such as collections or late payments.
Refinancing
Refinancing pays off your original loan and creates a new auto loan, typically with different terms, such as shorter or longer repayment times, a different interest rate and monthly payments. You may also refinance to take a co-signer off a loan or to get promotional rates through the lender that are much better than your original loan terms.
New Account
A refinanced auto loan is a new account, which can raise or lower your credit score depending on how the rest of your credit file looks. If you have a well-established credit file with many long-running accounts, a refinanced auto loan is not going to have a large impact. If you are just establishing credit, however, the new account status may greatly shorten your average credit length, reducing your credit score. As the account gets older, this negative affects your credit less and less.
Inquiries
When the refinancing lender pulls your report, the credit bureau places an inquiry on your report. Inquiries have a slight negative affect on your credit score. Generally, they do not impact you getting credit unless you have a large number of inquiries on your report. If you check refinancing options with several different lenders for your auto loans, their inquiries all count as one. Inquiries completely disappear from your report within two years.
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