Whether you have the
plan to purchase a new car for your family, want to expand your business, or
move into a new apartment, getting loans helps us to deal with all the cash
shortfalls. But even if loans are widely available, it is necessary to be
cautious while depending on debts. Usually, debts are repaid in monthly EMIs
that include both principal and interest components. And even a small reduction
in the loan EMI can significantly reduce the overall loan burden. This is where
you can consider loan refinancing. But before considering loan refinancing, it
is important to be aware of its potential effects. In this blog, we will talk
about how loan refinancing can affect your credit score.
But before that, let’s
have some information about loan refinansavimas and
how it helps:
When it comes to
refinancing an existing loan, you have to take a new one for paying off the
existing one. So, the main goal of refinancing is to reduce the burden of the
present mortgage. Usually, when borrowers find some better rates elsewhere,
they switch the existing loans to new lenders. And then the new lenders pay off
the total outstanding amounts to the old lenders and the borrowers can repay
their loans to the new lenders.
But now the question
is how does refinancing affect your credit score?
Yes, refinancing
affects your credit score. The higher the credit score, the lower interest
rates you will be able to avail yourself of. So, it is important to check your
present credit score before you consider refinancing. When your interest rates
decrease, the total burden of the loan will also decrease. And every time, you
would place a request for a credit score from any credit bureau, it will result
in a soft inquiry. But this will not have any impact on your credit score.
But every time any
third party or the lender requests the credit score, this will result in a hard
inquiry. And these inquiries would have an impact on your credit score. And it
would take a minor hit. This is the reason why financial advisors often
recommend borrowers do not approach multiple lenders all at once.
Your credit score will
also take a hit when you refinance the existing loans. Yes, it would sound
counterintuitive, but refinancing takes a big toll on your credit score. But if
you repay the loans on time, your credit score would improve. But missed EMIs
or delayed repayments would reduce the score.
How long it takes for
the credit score to recover after refinancing?
It is often
disheartening to see your credit score drop after refinancing. But, there is
nothing to worry about as this kind of drop is temporary. It would take one to
two years for the credit score to recover from the effect. And you can speed up
this process by repaying the loan EMIs on time and strengthening the track
records of repayment. But keep in mind that the situation often varies from one
borrower to another.
