Can I Refinance an Auto Loan If I’m Upside Down?

Due to the ever-increasing prices of both new and used cars, the vast majority of drivers today will find themselves financing their vehicle purchase. This is especially true with new cars, which were financed a whopping 81.2% of the time in 2021. 

As you pay off your auto loan, your vehicle’s value will likely change. So, what do you do if you find yourself wanting to refinance your auto loan, but owe more than your car is worth?

Negative Equity: What It Means to Be Upside Down on Your Car

With an auto loan, buyers pay for their car in monthly installments over an agreed period of time. Your lender holds your vehicle’s title as collateral to secure the loan until the total debt is repaid, in case you default. After your debt is paid off, your lender will release the lien on your vehicle and you’ll have a free and clear title.

Over the course of your loan period, though, there’s a chance that your vehicle depreciates (or loses value) faster than you’re able to pay down your remaining auto loan balance. Owing more on your car than it’s worth is called negative equity, or being “upside down” on your loan. 

Negative equity can sometimes be the result of market trends. It can be due to the condition of your vehicle, like if you drive too many miles in a year or if the car has been in an accident. Or it can also occur if you have a long repayment term and/or high interest rate on your loan, which prevents you from paying down the principal balance faster.

Regardless of how you get upside down on your car, it’s a tricky place to be. 

If you total your vehicle (and don’t have GAP coverage) or it’s stolen, your insurance carrier will only pay you for the market value of the car. If you sell your car, you will likely get less for the vehicle than you owe. And in either case, you’ll still need to pay off the full balance of your auto loan… which means covering the difference out of your own pocket. 

Benefits of Refinancing an Auto Loan

While your auto loan can last anywhere from two to nine years in length, on average, there may be times when you want to refinance that loan before the vehicle is paid off. Refinancing can allow you to

• Reduce your auto loan’s interest rate
• Adjust your monthly payment requirement 
• Add or remove a cosigner on the loan
• Get out of debt sooner

With the right loan, you can accomplish all of these! 

If you are in a negative equity situation, though, you may find it a bit more difficult to get your refinance loan application approved. After all, your lender secures your auto loan with the vehicle’s title. If you owe more than your car is worth and you default on that loan, your lender won’t be able to recoup all of their money even if they repossess the car.

So, what are your options?

Can I Refinance My Loan If I’m Upside Down?

The short answer is that yes, you can indeed refinance an upside down auto loan. The caveat is that not all lenders allow for negative equity refinancing. 

Auto lenders each have their own requirements for financing and refinancing, which include limits on a vehicle’s loan-to-value ratio (or LTV). This percentage demonstrates how much of the vehicle’s equity is available, by comparing what the car is worth to how much you still owe.

For example, if you have a car that’s now worth $25,000 and you still owe $10,000 to your auto lender, you have an LTV of 40%. If you still owe $27,000 on that vehicle, though, your LTV would be 108%. 

There are some auto lenders that will allow LTVs of up to 125%, as long as the borrower’s credit and income qualify them for their new loan. These higher LTV limits may also depend on the age, mileage, and model of the vehicle, so they aren’t available to everyone.

If you are upside down on your vehicle and are unable to get approved for an auto loan refinance, you do still have other options to consider. You could:

• Take out a personal loan and use the proceeds to pay off your auto loan balance.

• Borrow against your home’s available equity with a HELOC, or home equity line of credit.

Either option allows you to pay off your vehicle’s note and potentially “refinance” the debt into a lower-rate loan. 

Some drivers will also choose to sell or trade in their vehicle, rolling that negative equity into their next auto loan. However, this often compounds the situation and makes it even harder to get out of debt. 

A car is a big — and often necessary — purchase for many people, usually requiring the help of an auto loan. If you find yourself owing more on your car than it's worth, however, you may want to consider ways to get out of that risky negative equity situation. 

Being upside down can make it harder (but not impossible) to refinance your auto loan. Even if you’re unable to get approved for a refinance loan with negative equity, there are other ways to satisfy the loan and pay off that debt, such as a HELOC or personal loan.