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Refinancing a car involves replacing your current auto loan with a new one. Doing so may help you reap benefits like lowering your overall loan costs, reducing your monthly payment or switching to a lender with better customer service.
But do you need to make a down payment to refinance a car? Should you make one?
While down payments are common when purchasing vehicles, they’re rare during the refinancing process. Here’s what you should know.
A down payment is not typically required when you refinance a car. Instead, lenders usually provide a loan amount that’s large enough to cover your entire outstanding balance so you can pay it off in full. In some cases, they even allow you to borrow more than you owe and pull the difference out in cash.
However, there may be rare instances where a lender requires a down payment, such as if you need to offset negative equity or bad credit to qualify. For example, if your car is worth $15,000 but you owe $18,000, a lender may require a down payment of $3,000 so the loan amount doesn’t exceed your vehicle’s value.
While not a down payment per se, refinancing may also involve upfront fees due to the need to re-register your car and transfer the title. Additionally, some lenders charge transaction fees to process loans, also known as application or origination fees.
You don’t need a down payment to refinance a car with most lenders, but you can choose to make one to reduce your loan balance. For example, if you owe $20,000, you could pay $5,000 upfront, leaving just $15,000 to refinance. This strategy has its benefits and drawbacks:
To refinance a car, you’ll typically need to meet various requirements related to equity, credit, income, and more.
One of the key factors auto refinance lenders consider is the amount of equity you have in your car — the difference between your vehicle’s fair market value and the outstanding balance on your car loan. More equity means less risk for lenders because they can recover more in the case of a default.
For example, imagine your car is worth $25,000 and you owe $20,000. If you refinanced the $20,000 and weren’t able to make the payments, the lender could repossess your car and sell it. If the car sold for $25,000, the lender would only recover a net of $5,000, leaving a loss of $20,000. However, if you only owed $10,000 on the car, the lender would recover $15,000.
To assess equity, lenders divide your outstanding loan balance by your car’s value and multiply it by 100. Most have maximum LTV limits between 100% and 150%, so your application could get denied if you have too much negative equity.
Lenders also check your credit to assess the likelihood that you’ll default on the loan. They often review various aspects of your credit reports such as your payment history, credit utilization, and credit history length. Additionally, they’ll check your credit scores, which sum up the risk you present based on all the information on your credit reports.
The better your credit, the better your chance to qualify and get competitive rates. However, if your credit needs work, you may not yet qualify for a rate that justifies a refinance.
Aside from credit and equity, auto loan refinance lenders often consider several other factors to determine eligibility, including:
Auto refinancing loans can vary widely between lenders. To improve the odds of getting a competitive deal, it’s important to shop around and collect multiple quotes. Once you have a few, review them alongside your current loan — comparing the interest rates, terms, monthly payments, fees, and overall costs.
Calculating the overall cost can be tricky, but our auto loan refinance calculator can do it for you. Once you have all the information you need, you’ll be able to see the whole picture of the loans and make an informed decision on which is best for your situation.
Tip: Be sure to weigh all the pros and cons of refinancing. A lower monthly payment doesn’t always mean a better deal. If you extend your loan term, it’ll often lower your monthly payment amount but increase your overall costs.
Still have questions? Check out these FAQs about auto loan refinancing and down payments.
Yes, it’s common to refinance a car without making a down payment. Lenders usually provide a loan amount large enough to pay off the entire existing loan. However, some may require a down payment if you don’t meet their LTV or other eligibility requirements.
Many auto loan refinance lenders require borrowers to have a minimum outstanding loan balance that exceeds a certain limit, often between $5,000 and $10,000. However, not all do. It varies by lender.
A refinance typically costs a few hundred dollars, but it varies between lenders and states. For example, you may need to pay an origination fee on the new loan, a title transfer fee, and a re-registration fee.
Refinancing an auto loan without a down payment can be worth it if it offers you a benefit over your current loan that’s worth the costs of the new loan. For example, if you qualify for a lower interest rate with another lender, refinancing could reduce your monthly payment amount and overall costs.
Learn about the possibility of making a down payment when refinancing an auto loan and gain insights on equity requirements.
