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Refinancing a car can save you money on interest or give you a lower payment and some breathing room in your budget.
When you refinance a car loan, it could temporarily ding your credit score, but it’s unlikely to hurt your credit in the long run.
Why refinancing can lower your credit score
When you apply for credit, the lender typically checks your credit. That causes a hard inquiry to be noted on your credit, which can cause a temporary dip in your score. The effect of a hard inquiry typically disappears in six months.
Car loan inquiries typically are bundled as a single inquiry if they're done in a compact time frame. For that reason, it's smart to do your loan shopping relatively quickly. VantageScore gives you a rolling 14-day period; FICO gives you 45 days.
A car loan refinance also might hurt your credit by reducing the average age of your accounts. That’s because your original car loan will be paid off early and replaced by a new auto loan. But that’s a relatively small element among the factors that affect your credit score.
How to prepare to refinance your car loan
Find out where you stand. Checking your credit does not hurt your score and gives you an idea of how lenders will size you up. The scores used for car loans are unlikely to be precisely the ones you see online or on credit card statements: Auto-specific scores typically give more weight to how you’ve made car payments in the past and are often on a scale of 250 to 900, rather than the 300 to 850 of most other FICO scores.