How to Refinance an Upside Down Car Loan

by Lisa McQuerrey ; Updated July 27, 2017
Car salesman holding the keys to a new car

Refinancing an auto loan is typically done as a way to reduce payments and save money by securing a better interest rate than the one you currently have. Your ability to refinance any type of auto loan depends on the value of the vehicle, your creditworthiness and your ability to make a down payment. While refinancing an upside-down car loan -- a loan on a car that’s worth less than what you owe on it -- is possible, it’s not always the smartest financial move.

Improve Your Interest Rate

If you’re in an upside-down car loan with a hefty interest rate and can refinance the loan to a much lower rate or shorter-term loan, it can make financial sense to do so. Lenders might require a down payment on the new loan to close the gap between the original amount borrowed and the current value of the car. You’ll need a good credit history to apply for this type of loan. Consult your current lender or your personal bank about refinancing options.

Roll the Loan Over

Consumers who are upside down in an auto loan sometimes “roll over” the difference into a brand-new auto loan, which makes this option more than a refinance. It means carrying over the balance of the old vehicle into the loan for a new vehicle, but it might be a good idea if you secure a lower interest rate and have a sizable down payment. However, it essentially puts you in a position of paying for two cars at once -- the new one you just drove home and the balance of the one you traded in.

Use a Home Equity Loan

According to Lending Tree, using a home equity line of credit to refinance your upside-down auto loan might be more financially prudent than looking into a new car loan or a refinance of your existing loan. Interest is typically lower with home equity lines of credit. If you make extra or more frequent payments to reduce the loan balance faster than you would have with your original loan, you can cut your losses on an upside-down loan. Use a loan calculator to see how different payment schedules and interest rates might suit your budget.

Other Considerations

If you decide to pursue a refinance, get quotes from several reputable lenders before making a choice. Consider options other than refinancing a loan on a vehicle that’s worth less than what you owe, such as keeping the car until you have the bulk of the loan balance paid down and then trading it in, selling it or revisiting the idea of a refinance. You may also be able to find a new car dealer who's offering rebates or incentives that provide enough cash back that you can pay off the difference in what you owe while buying a new car.

About the Author

Lisa McQuerrey has been a business writer since 1987. In 1994, she launched a full-service marketing and communications firm. McQuerrey's work has garnered awards from the U.S. Small Business Administration, the International Association of Business Communicators and the Associated Press. She is also the author of several nonfiction trade publications, and, in 2012, had her first young-adult novel published by Glass Page Books.

Photo Credits

  • XiXinXing/iStock/Getty Images