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Ask Dr. Don
Bankrate.com

Does an auto refinance hurt credit score?

Dear Dr. Don,
I took an auto loan on a new car in August 2002 for 60 months at an APR of 5.39 percent. I have 40 months remaining on the loan. My monthly payment is $325.64. I am considering refinancing my loan for 36 months at an APR of 3.99 percent, which will make my monthly payments a little more, but I get to pay off my loan faster. I was advised to do a rate modification for the remaining period of my loan and not to refinance as my credit history would be hit. Is this true? I do know that I have an excellent credit history. Could you please advise?
Thank you,
Anjali Amortization

Dear Anjali,
A loan application and approval will show up on your credit history and will have a short-term effect on your credit score. With an excellent credit history, there's no reason to avoid refinancing your auto loan because of the impact it would have on your credit score. If you're currently in the market for a mortgage loan or other secured credit, that would be a good reason to postpone the auto refinance. But with nothing on the horizon, the effect on your credit score isn't a reason to avoid refinancing.

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That said, it's not a bad idea to ask your current lender about a rate modification. If they're willing to reduce the rate, you'll capture any interest savings without a refinancing. You'll potentially save time and money.

If your current lender is unwilling to reduce your interest rate, you need to review the loan documents and make sure there's not a prepayment penalty on the loan. You'll also want to make sure that the loan interest expense isn't calculated using the Rule of 78s because that effectively results in a prepayment penalty.

I estimated your interest savings using Bankrate's Auto Loan Calculator. In the estimate you save about $380, less any loan costs, by refinancing. You can use the calculator to calculate your exact savings.

  Existing-loan refinancing Refinancing  
Loan date:
August 2002
May 2004
 
Initial term (months):
60
36
 
Interest rate:
5.39%
3.99%
 
Loan amount:
$17,093.57
$11,898.13
 
Payment:
$325.64
$351.23
 
       
Remaining term (months)
40
   
Loan balance:
$11,898.13
   
     
Savings
Interest expense on loan balance:
$1,127.47
$746.05
$381.42

-- Posted: April 20, 2004

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See Also
Keep your eye on the loan terms
Avoiding the Rule of 78s
Financial advice glossary
More Dr. Don stories

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