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Auto Refinance

OCT 07, 2022

Will refinancing my car hurt my credit score?

Learn if you can refinance a car loan and how it will hurt your credit score.

By

Caribou

5 min read

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Do you know what your credit score is? It’s worth finding out because it may determine your ability to get a new car loan in the future, or whether or not you can refinance your current auto loan. Your credit score is one of the most important factors when looking to take out a loan or refinance an existing loan, and it can affect everything from the loan's interest rate down to the lender you work with. Let's cover what credit scores are and the basics of what happens to your credit report during a loan refinance.

What is a credit score?

Your credit score is a number between 300-850 that indicates how likely you’re able to pay off your debts over time. These scores are a widely used indicator which credit unions and banks use to measure whether someone will be able to pay back loans. The credit score is an important part of the lending process because it allows lenders to determine whether or not they should provide you with a loan. This means that many lenders will only consider you for loans if your score is high enough to meet their requirements.

The type of lender you’re able to work with also depends on your level of credit and what your credit history looks like. For example, some lenders will offer loans more readily to people who have a good credit history and stable income, while they are often unwilling to give a loan to someone with a bad credit history or low income. According to Experian, scores between 700 to 850 are usually considered “good”. Scores of 650 or higher are normally suitable for auto loan refinancing through most lenders.

If you’re looking to take out a car loan, it’s important that you check your credit beforehand. Make sure it’s up-to-date and try to raise your credit score if possible so that lenders can see how reliable you are when it comes to paying back your debt in the future. Different components in your credit report impact your credit score, things like your existing debt, outstanding loans, other personal liabilities, and length of credit history.

See if you can save money on your car payments

Looking to save money on your car loan? Check to see if you can put cash back in your wallet. On average, Caribou customers save $110+ a month*.

How is your credit score calculated?

Credit scores are calculated from a variety of factors such as credit history, loan payments made on time, and the amount of debt you currently have. Having a lower number means you have a higher risk to lenders. It can lead to being charged a higher interest rate when borrowing money or keep you from refinancing entirely with denied loan applications. The higher your number is, the lower your lending risk. Higher scores mean you will qualify for loans more often or get a better interest rate. To better understand the score, we can look at the report definition from our terms glossary.

The credit report definition

Credit reports include your history over several years. The definition of a credit report is:

  • A credit report is a record of your credit history which normally spans 7 to 10 years. This report shows information related to bank accounts, loans, bankruptcies, and personal liabilities. The information in a credit report is used to calculate a borrower’s credit score, which helps determine whether or not someone will be able to meet financial obligations.

How car loan refinancing affects your credit score

New car loans are lines of credit. Therefore, like any standard loan, finalizing a new loan does negatively impact your credit. This is because of the credit pulls and inquiries performed during the approval stages. A credit pull is an inquiry into your credit report and history that checks your credit score. Credit pulls can only be performed by an authorized party with your approval so they can access your loan balance information and payment history. There are two different types of credit pulls including hard and soft, but only hard inquiries will slightly reduce your credit score for a short period.

What does impact your credit?

  • Hard credit pulls check your suitability for a loan and can impact your credit since you’re applying for new credit. This type of pull occurs prior to issuing a new line of credit where you have already selected a rate with a lender and are applying for approval. A hard pull can drop your credit score a few points when refinancing a car loan.

What does not impact your credit?

  • Soft credit pulls check your credit history along with other factors like how many times they have borrowed money. Unlike a hard credit pull, a soft credit pull does not affect credit scores. Soft pulls are used early on in the loan process to determine things like your finance suitability.

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Should you refinance your new car?

If you’re thinking about refinancing your auto loan, one of the first things to consider is what you’re trying to gain from the process. Refinancing replaces an existing loan with a new one, giving you the opportunity to get one that works better for you. The benefits of refinancing can include getting a new loan at a lower rate, having a cheaper monthly car payment, shortening the loan term, finding a lower interest rate, and/or refunding dealership extended warranties and prepaid maintenance plans attached to your original loan. We cover these goals in detail in our Understanding Auto Refinance guide and talk about the life of the loan. The small, temporary drop in your credit could be worth the added benefits.

Tying to all together

In summary, it's possible that refinancing your car loan could negatively affect your credit score. However, a slight, temporary dip in your credit score can be worth it depending on the type of loan, amount, and length of time you currently have. Consider your options before signing a loan agreement and make the right choice for your financial goals and credit in the long run.

Credit score impact FAQs

  • Should you refinance your new car? Refinancing can be a good option to pursue depending on what you’re trying to gain from the process. The benefits of refinancing can include getting a new loan at a lower rate, having a cheaper monthly car payment, shortening the loan term, finding a lower interest rate, and/or refunding dealership extended warranties and prepaid maintenance plans attached to your original loan.

  • Will refinancing my car hurt my credit score? Yes, refinancing your car often impacts your credit score. The hard pull which is part of the loan finalization process can drop your credit score a few points for a short period.

  • What is a credit score? Your credit score is a number between 300-850 that indicates how likely you’re able to pay off your debts over time.

  • What credit score do I need to refinance? Scores of 650 or higher are normally suitable for auto loan refinancing through most lenders.

  • How is your credit score calculated? Credit scores are calculated from a variety of factors such as credit history, loan payments made on time, and the amount of debt you currently have.

Continue reading

What are variable versus fixed interest rates?

About the auto refinance process and application steps

Use the auto refinance calculator to estimate your savings

Through Caribou, you could start saving today!

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Contact Details
NMLS #1746612
1.877.445.0070

Mon - Fri: 9am - 8pm EST

Sat - Sun: 9am - 4pm EST

1717 Rhode Island Ave, NW, Suite 500 Washington, DC 20036

Caribou Insurance Services, LLC
1.877.255.2660
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insurance@gocaribou.com


* This information is estimated based on consumers who were approved for an auto refinance loan through Caribou on or after 1/1/2022, had an existing auto loan on their credit report, and accepted their final terms. As of 9/27/2022, borrowers who refinance save an average of $111.16 per month. Refinance savings may result from a lower interest rate, longer term, or both. There is no guarantee of savings. Your actual savings, if any, may vary based on interest rates, the repayment term, the amount financed, and other factors.

+ To check the refinance rates and terms you qualify for, we conduct a soft credit pull that will not affect your credit score. However, if you choose a loan product and continue your application, we or one of our lending partners will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

++ Social security number is required should you choose to move forward in the loan application process.

** APR is the Annual Percentage Rate. Your actual APR may be different. Your APR is based on multiple factors including your credit profile and the loan to value of the vehicle. APR ranges from 2.83% to 36.00% and is determined at the time of application. Lowest APR is based on loan amount of $45,000, 36 month term, and is available to borrowers with excellent credit and only in certain states. Conditions apply. Advertised rates and fees are valid as of 11/1/2022 and are subject to change without notice. Insurance savings will not result from lower APR.

Terms and Conditions apply. Caribou reserves the right to modify or discontinue products and benefits at any time without notice. Participating lenders, rates and terms are also subject to change at any time without notice. The information you provide to us is an inquiry to determine whether our lenders can make you a loan offer. If any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. We do not guarantee that you will receive any loan offers or that your loan application will be approved. If approved, your actual rate will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Offers not available in MA, MD, MS, NE, NV, WI, WV.

Insurance products offered through Bindable and Caribou Insurance Services, LLC. Caribou is working with Bindable who owns MyLifeProtected and MassDrive Insurance Group, LLC, the licensed agent for all products.