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Is your credit impacted if you have to refinance a car loan?

Is your credit impacted if you have to refinance a car loan?

As you can imagine, Car Nation Canada has been asked a lot of questions around car finance, loans, servicing loans and refinancing over the past few months. One of the more prevalent questions has to be, ‘Is your credit impacted if you have to refinance a car loan?’

Refinancing is a popular way to rebalance outgoings and make a car loan more affordable. Essentially you use a new loan to pay off your old one. That new loan could be larger to encapsulate all debts into a single outgoing or be smaller to take into account the amount you have already paid off.

Either way, refinancing can be an effective way to manage outgoings if things are tough or if your current deal isn’t doing you any favours.

Does car loan refinancing impact your credit score?

So does car loan refinancing impact your credit score? Slightly, but it’s nothing to worry about.

Once you have shopped around for a new car loan and decide to accept one, the lender will perform a hard inquiry on your credit report. This will slightly impact your score as all hard inquiries do. There will also be a further slight impact as new borrowers are statically more likely to default than existing borrowers.

The impact should be minor and will fully recover in time though.

What do I need to consider when refinancing a car loan?

Refinancing is exactly the same as applying for any loan. You want to end up in a better financial position than before.

When applying for a new car loan, you will typically want to achieve one or both of the following:

Reduce your monthly outgoings

Refinancing is useful if you have paid a significant portion of your existing loan and need more money in the bank each month. You can either borrow less so your car payments are lower or you can borrow a little more and pay off all debt so you just have a single payment each month.

Reduce the interest rate

If the interest rate you are currently paying is over and above what is available to you now, now might be a good time to refinance. This is especially true if you originally had a bad credit car loan or were paying over the odds for interest.

Either way, you have to make sure the fees and total cost of the loan will provide the savings you need. Otherwise you may be better off sticking to your current deal.

To answer the original question, yes your credit score is impacted when you refinance. The good news is that the impact is minor and will correct itself over time.

For more information on car loans, refinancing or leasing, visit your nearest Car Nation Canada dealership. We would be happy to help!

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