Can You Refinance a Car with Negative Equity?

Owing more on your car than what it’s worth — in other words, having negative equity — is a tough spot to be in. When you’re upside down or underwater on your car loan, it can be more difficult to refinance. Not all lenders will refinance a car with negative equity, and it typically costs more than traditional refinancing. 

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On the other hand, refinancing could help you lower your rate or shrink your monthly payments, making it easier for you to balance your budget each month. Here’s how to refinance a car with negative equity, including where to find lenders, how to boost your odds of approval, and alternatives worth considering.

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Key takeaways

• When you have negative equity, you owe more on your car loan than the vehicle is worth. 
• Not all lenders offer negative equity refinancing, so you’ll need to shop around and compare lenders to find the right fit.
• Lenders that offer negative equity refinancing typically look at your credit score, debt-to-income ratio, and loan-to-value ratio when evaluating your application.

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What is negative equity on a car loan?

Negative equity happens when your car loan balance exceeds the vehicle’s market value. There are multiple reasons you may have negative equity in your car, but most are related to either your loan details or the vehicle itself.

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Loan factors that can contribute to negative equity include: 

• Taking out a loan with a low or no down payment
• High interest rates on your auto loan
• Long loan terms that slow equity buildup

Vehicle factors that can reduce your resale value include:

• Car accidents
• Excessive wear and tear
• High mileage

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Rapid depreciation — sometimes up to 20% in the first year — also reduces what your car is worth. For instance, let’s say you purchase a car for $40,000, and after one year, its value has dropped to $32,000 due to depreciation. But your loan balance after one year is $32,800. It hasn’t decreased as quickly as your car’s value has, leaving you with $800 in negative equity.

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Can you refinance a car if you owe more than it’s worth?

You can refinance your car if it’s worth less than you owe, but lenders are more cautious about refinancing an underwater car loan due to the increased risk. Your eligibility for various refinancing options will depend on the lender's criteria and your financial situation.

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If you need to know how to get out of a negative equity car loan, it helps to understand which factors lenders will be looking at, such as:

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• Loan-to-value (LTV) ratio: How much do you owe compared to the car’s market value? For instance, if you owe 20% more than the car is worth, you have an LTV of 120%. Lenders prefer a lower LTV. 

• Credit score: A strong credit score can help you secure better refinancing terms, even if you face negative equity.

• Income and debt-to-income ratio: A lower debt-to-income ratio shows lenders you can handle your payments and increases your chances of approval. 

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Finding lenders that refinance upside-down car loans

Not all lenders will cover a negative equity refinance, so it’s worth narrowing your search to those that will.

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• Banks: Traditional banks that will refinance upside down car loans will likely have strict LTV, credit and debt-to-income requirements. Having a banking relationship already could help.
• Credit unions: Some credit unions will refinance auto loans with loan-to-value ratios of up to 125%, although you’ll need to become a member to apply.
• Online lenders: Online lenders often provide greater flexibility, including for underwater loans. However, interest rates may be higher for higher LTVs and lower credit scores. You can use a platform like RefiJet to find online lenders that offer loans with LTVs over 100%.

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Shop around to compare multiple loan offers. You can prequalify online with many lenders to see your personalized rate without affecting your credit.

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How to improve your chances of refinancing with negative equity

Negative equity can make refinancing more challenging, but the right strategy can improve your chances of getting a better loan. Consider these tips to prepare for a negative equity car refinance:

• Improve your credit score: Higher credit scores typically lead to better rates. Pay your bills on time, pay down your credit card balances, and avoid taking on new debt to boost your score.
• Pay down your loan faster: Making extra payments on your loan can reduce negative equity and bring your loan balance closer to your car’s market value. 

• Consider a shorter loan term: A shorter loan term may increase your monthly payments, but it can lower your interest rate and help you gain equity faster. Use RefiJet’s auto refinancing calculator to see the effect of different loan terms.
• Make a down payment: Putting money down to reduce your negative equity can boost your chances of approval by lowering the amount you’re refinancing.
• Add a cosigner: Applying with a cosigner who has a strong credit score and low debt-to-income ratio could help you get approved.

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Alternatives to negative equity car refinancing

If you aren’t ready to refinance your upside-down car loan, there are other strategies to help you get out of an underwater loan.

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Keep the car and make bigger payments. Keeping the car is the simplest option. If you can, add some extra money to your payment each month, ensuring it goes toward the principal. Paying more toward your current auto loan each month can help you pay down your loan faster and build equity sooner. 

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Sell or trade in your vehicle. If you can cover the negative equity, selling your car can free you from ongoing payments and maintenance costs. Another option is trading it in at a dealership. While this may reduce what you owe, dealerships often roll negative equity into a new loan. However, car loan rollovers mean you could still be upside down — with potentially higher monthly payments.

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Modify your existing loan. Some lenders allow loan modification, which could lower your interest rate, extend your loan term, or adjust other terms to make your loan more manageable.

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When it makes sense to refinance your upside down car loan

Here are a few situations when refinancing is the right option, even with negative equity:

• If your credit score has markedly improved since you took out your loan, refinancing could help you get a lower rate and save money on interest. 
• If you can afford higher payments, refinancing to a shorter term could help you escape negative equity faster so you can begin building positive equity. 
• Refinancing could also help if you’re struggling to make ends meet each month, by reducing your monthly payment to fit better into your budget. 

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If you’re looking for a , RefiJet can help you explore your options. We’ll help you compare offers from a network of lenders and find a solution that fits your financial needs.

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FAQs

Still have questions about refinancing with negative equity? Read our most frequently asked questions.

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Will dealerships pay off negative equity?

‍Some dealerships will roll your negative equity into a new loan when you trade in your vehicle. However, this means you start your new loan with negative equity, too.

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Can you refinance a car loan if you have negative equity?

Yes, with the right lender, you can refinance with negative equity. It depends on the lender's policies, your credit score, and your car’s loan-to-value (LTV) ratio.

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Will GAP insurance cover negative equity?

‍Yes, Guaranteed Auto Protection (GAP) waivers and insurance help cover the difference between what you owe on your car and its actual cash value if your vehicle is totaled or stolen.

‍However, GAP insurance won’t cover routine loan payments or assist with refinancing. 

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How much negative equity will a bank finance on a new car?

‍The amount of negative equity a lender will refinance varies, but many require a loan-to-value (LTV) ratio below 125%. The more negative equity you have, the higher your interest rate and loan costs may be.

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Can I sell my financed car with negative equity?

‍Yes, but you’ll need to pay the difference between the sale price and what you still owe.

If you’re unable to pay the difference, you could negotiate a payoff plan with your lender or consider a trade-in where you roll over your negative equity into a new loan.

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