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Owing more on your car than it’s worth — also known as being upside down or underwater — is a tough spot to be in. This is called negative equity.
Refinancing an auto loan with negative equity is possible, but not all lenders allow it. It usually comes with additional costs than traditional refinancing.
Your refinancing options depend on the lender’s criteria, your creditworthiness and your car’s loan-to-value (LTV) ratio. Some lenders will allow you to roll negative equity into a new loan, but this can extend your loan term and paying more interest in the long run.
This article will help you determine if your car loan is underwater and explore ways to address the issue.
Negative equity happens when your car loan balance exceeds the vehicle’s market value, often due to factors like low or no down payment, high interest rates or long loan terms that slow equity buildup. Accidents, excessive wear or high mileage can lower your car’s resale value, while rapid depreciation — sometimes up to 20% in the first year — also reduces what your car is worth.
Refinancing with negative equity isn’t impossible, but it comes with extra hurdles. Your eligibility for various refinancing options will depend on the lender's criteria and your financial situation.
Lenders are more cautious about refinancing an underwater car loan due to the increased risk. Lenders look at several factors before approving an auto refinancing with negative equity, including:
If you’re looking to refinance with negative equity, comparing lenders that specialize in these loans can help you find the best deal.
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 your refinance:
If you aren’t ready to refinance a car loan with negative equity there are other strategies to help you get out of an underwater loan.
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, meaning you could still be upside down — with potentially higher monthly payments.
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.
If you’re ready to refinance your negative equity, 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.
Still have questions about refinancing with negative equity? Read our most frequently asked questions.
Some dealerships will roll your negative equity into a new loan when you trade in your vehicle. This arrangement means you start your new loan in a negative equity position.
Yes, 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.
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.
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.
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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