Can You Refinance a Car With Negative Equity? What To Know and Your Options
- Negative equity, also called an upside-down car loan, is when you owe more money on your car than it’s worth.
- You can get out of an upside-down car loan by refinancing your car or trading it in and rolling the negative equity into a new auto loan.
- You can avoid negative equity by taking steps like providing a large down payment when you purchase a car.
You can refinance a car with negative equity in some circumstances. Negative equity means you owe more on your car loan than the vehicle is worth.
Refinancing your car with negative equity can help relieve your financial stress by extending your loan term and, in some cases, help you qualify for a lower APR. Before you refinance a car with negative equity, understand the consequences. Depending on how you refinance the car, you could be starting a cycle of negative equity that’s hard to break.
What is negative equity on a car loan?
Negative equity means you owe more than the car is worth. In other words, the car’s value is less than the loan balance. If you sell or trade in the car, the sale price won’t cover what you still owe — so you’d have to pay the remaining difference out of pocket.
Here’s an example of negative equity:
| Purchase price | $30,000 |
| Loan balance | $26,000 |
| Car value | $21,000 |
| Negative equity (loan balance minus the car value) | $5,000 |
If you try to sell or trade in the car in the example above, you would have to come up with $5,000 to cover the negative equity.
Negative equity is common, especially since new cars depreciate 20%-30% in the first two years. Small down payments and long loan terms (72-84 months) are also frequent causes of negative equity. Early in the loan, most of the payment goes to interest, not principal, so your equity increases slowly.
If you trade in the car, you may be able to roll the negative equity into the new car loan. However, if you do that, you may be upside-down on the new car as well, depending on the loan amount, the size of the down payment, and the new car’s value.
Negative equity poses another risk if your car is stolen or totaled in an accident. If the insurance settlement won’t cover the balance of the loan, you could be stuck paying for a car you can no longer drive.
Consider Guaranteed Asset Protection (GAP) insurance to make up the difference between the insurance settlement and the loan balance. However, GAP insurance doesn’t help with regular payments.
Ultimately, you are responsible for paying the full balance. If you roll negative equity from a previous loan into a new loan, you may find yourself in another upside-down situation.
Can you refinance a car with negative equity?
Yes, you can refinance a car with negative equity. But it’s usually up to the lender.
The lender will rely on several decision factors, including:
- Loan-to-value (LTV) ratio. Lenders limit how much they will loan based on the car’s value. If your loan balance is higher than the car’s value, you may need to pay the difference in cash to qualify for refinancing.
- Credit score and income. Lenders look at your income and history of payments to determine your loan terms, including your debt-to-income ratio.
- Vehicle age and mileage. Some lenders limit the age or mileage of a car for a loan, which affects the car’s value.
Lenders typically handle negative equity by rolling the balance into the new loan. Based on the example above, say you want to refinance your current car with negative equity.
If your current loan balance is $26,000, the car is only worth $21,000 and the lender doesn’t allow negative equity in the new loan, you’ll likely need to pay down that $5,000 gap before refinancing. However, compare that to a lender that may offer to bridge some of that gap.
| Car value | Loan balance | Max loan allowed | What you must pay | Resulting negative equity | |
|---|---|---|---|---|---|
| Refinance at 100% LTV | $21,000 | $26,000 | $21,000 | $5,000 | $0 (if negative equity paid) |
| Refinance at 120% LTV | $21,000 | $26,000 | $25,200 | $800 | $4,200 (rolled into new loan) |
Here’s what this means for you: The higher the LTV, the less cash you’ll need to pay upfront to refinance. If your loan balance still exceeds the lender’s LTV limit, you’ll need to pay the difference out of pocket. Even after refinancing, you may still have negative equity — just a smaller amount depending on the loan terms.
How much negative equity is too much to refinance?
How much negative equity is too much depends on the lender. Some lenders cap at 100% LTV of the car’s value (meaning no negative equity). Others allow up to 120%-130% of the car’s value to pay for taxes, fees and dealer add-ons. With a loan amount higher than the car’s value, you will end up with negative equity.
The more negative equity you have, the harder it is to refinance. Even if you’re approved, the loan may cost more over the long term due to higher interest rates. You may refinance to a longer loan term for lower payments, but you’ll likely end up paying more interest over the life of the loan.
Use online tools like Kelley Blue Book and Edmunds to get an estimate of the market value of your car to compare to the loan balance. If your loan balance is higher than the value of your car, you have an upside-down car loan. Knowing these numbers can help you decide whether to trade in or refinance your car.
When refinancing a car with negative equity makes sense
While refinancing a car with negative equity has its pitfalls, there are times when it makes sense.
- You qualify for a much lower interest rate. If rates have fallen or your credit score has improved, you may qualify for a lower APR.
- You need immediate payment relief. You can qualify for lower payments by refinancing your car for a longer term, which will lower your payments.
- You plan to keep the car long-term. If you plan to keep the car long-term and perhaps eventually pay it off, refinancing could make that possible with lower payments. Negative equity matters most if you plan to sell or trade in the car. It can also affect refinancing or insurance payouts if the car is totaled.
- You want to change the names on the title. Some lenders may allow you to refinance your car into someone else’s name, while others won’t. You may have to sell the car to the other person instead. The other person must be qualified to take over the loan.
When refinancing with negative equity is a bad idea
Although you may feel desperate to get out from under payments you can no longer afford, refinancing a car with negative equity carries some long-term risks.
- Paying more interest. If the original loan was for 60 months and you refinance after two years for another 72 months, you’ll pay more interest over the life of the loan, even if the APR rate is lower.
- Staying upside-down longer. Extending the loan term means slower equity buildup. With a higher loan balance and interest rate, it’ll take longer to pay the loan balance down and achieve positive equity.
- Stretching loan terms too long. With a longer loan term, the value of your car will continue to depreciate, possibly faster than you can pay down the loan. This puts you in unfavorable loan-to-value territory.
Your options if you have negative equity on a car loan
Refinance and roll in the negative equity
You can refinance the existing loan balance, and any negative equity will be included in the new loan. You’ll get a new loan with a new loan term and payment schedule. The new loan will extend the time you’ll pay on the car, which means you’ll pay more interest even if the payment is lower.
Pay down the loan before refinancing
You can make a lump sum payment to cover the negative equity, or make additional principal payments each month. Check with your lender to see how additional payments are applied to your loan. Once you’ve caught up with the negative equity, you can refinance, likely with better terms.
Trade in your car
You can pay the difference between the car’s value and the loan balance in a lump sum. Or, the lender can roll it over and add the negative equity to the new loan. Depending on the car’s value and how much you put down, you may wind up in another negative equity situation.
Sell the car privately
You can sell the car privately, which will likely get you a higher price compared to trading it in at a dealer. Use the proceeds from the sale to pay off the loan. If you still have negative equity, you’ll have to make up the difference out of pocket.
Keep the loan and focus on paying it down
Often, the safest financial move is to focus on paying off the loan. You can make lump-sum or additional principal payments to speed up the process. At some point in the life of the loan, you will come into a positive equity position. Then, you can decide what you want to do with the vehicle.
How to improve your chances of refinancing with negative equity
- Improve your credit score: Pay your bills on time and avoid taking on new debt to demonstrate financial responsibility. Use LendingTree Spring to track your credit score and get personalized tips on taking control of your finances.
- Pay down the principal: Make additional principal payments to close the gap between the car’s value and the loan balance.
- Consider a cosigner: Adding someone with strong credit to your refinancing application could increase your chances of approval. Keep in mind that the cosigner is just as responsible as you are for paying the loan.
- Compare multiple lenders: Shop around for auto refinancing rates with multiple lenders. You can get prequalified from several lenders to get a good idea of the terms you can qualify for without impacting your credit score.
Frequently asked questions
Yes, you can refinance a car that’s upside-down. Be sure you understand the costs and potential risks of refinancing a vehicle with negative equity, as well as what it may take to qualify for a loan.
Typically, the new loan has a longer term, resulting in a lower monthly payment. You may also qualify for a lower APR, which could help with your payments.
Refinancing negative equity won’t directly hurt your credit, but it could hurt your debt-to-income ratio or may lead to missed payments. While your DTI ratio won’t impact your credit, missed payments will. Applying for refinancing requires a hard credit pull and will likely lower your credit score temporarily.
You can refinance a car loan with bad credit, but you’ll likely pay a higher interest rate. Search for lenders that specialize in bad credit auto loans.
It might take a few months to a few years to get out of negative equity, depending on the car’s value and the loan terms. If your car depreciates quickly, like many luxury cars do, it could take a while to be right-side-up.
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