Upside-Down Car Loan Refinance

If you have a good credit score and a high income, an upside-down car loan refinance could help you get a new loan with a lower interest rate.

Updated: April 27, 2023

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A car loan goes upside down when you owe more on the loan than the vehicle is worth. For example, if you owe $15,000 on a car valued at $10,000, you have an upside-down car loan. If you were to sell the car or trade it in, you wouldn’t receive enough money to pay off your outstanding loan balance. So, how do you handle this stressful financial situation?

If you have a good credit score and a high income, an upside-down car loan refinance could help you get a new loan with a lower interest rate. That can help you pay down your loan balance and get your loan right side up again. Here’s how to make it happen. 

Key takeaways

  • A long loan term, low down payment, or sudden depreciation can cause you to go upside down on your car loan. 

  • Refinancing can help you salvage the situation by helping you get a lower interest rate and a new repayment plan. 

  • You’ll need a good credit score and a high income to qualify for a refinance loan.  

  • To avoid going upside down on a car loan, you can make a larger down payment, pay taxes and fees up front, or choose a shorter loan term. 

1. Calculate your negative equity 

First, figure out how upside-down your loan is. Negative equity is the difference between what you owe on the loan and the current value of the car. To calculate it, you need to determine how much your car is worth, then subtract that amount from what you still owe on your loan. 

You can figure out the value of your car using sites like Kelley Blue Book or Edmunds, which consider factors like the year, model, mileage, and condition of your vehicle. Once you know the value, subtract that amount from your remaining loan balance to determine your negative equity. 

For example, if you still owe $15,000 on your loan and your car is worth $10,000, then you have a total of $5,000 in negative equity. 

2. Discuss options with your lender 

Next, contact your lender. They may be willing to work out a deal to help you get your loan right side up again. Ask if you can make extra payments and have them put toward the loan’s principal. This will help you pay down the actual balance of your loan, which can reduce your negative equity. If your loan contract includes a provision for prepayment penalties, ask your lender if they can waive these charges. 

If the lender is unwilling to work with you, you could consider selling your car. Just remember that most lenders will call in the full loan at the time of sale. If you have the cash on hand, you could pay off the loan and be done with it. Again, you’ll need to speak with your lender about waiving any prepayment penalties.  

If you can’t afford to pay off the full loan at the time of sale, it’s time to look into refinancing.

4. Get prequalified for a refinance loan 

If you’re ready to refinance your upside-down loan, it’s time to shop around. First, look up the loan options and interest rates offered by top banks, online lenders, and credit unions. You can either apply for a car-specific refinance loan or take out a personal loan with a low rate and use it to pay off your auto loan yourself. 

Currently, some of the lowest auto loan refinance rates are around 2 to 5%. That said, your actual rate will depend on your credit history. Getting prequalified for a few loans can give you a better idea of the actual rates you’ll be offered.

Unlike actually applying for a refinance loan, prequalification only triggers a “soft inquiry” into your credit report. This tells credit bureaus that you’re shopping around responsibly. As such, it won’t impact your credit score. 

5. Refinance your upside-down loan

Refinancing won’t reduce your loan balance, but it can help you get a lower interest rate and a new loan term. If you’ve been struggling to make your current car payments, refinancing for a longer term can help you reduce your monthly bill. However, this isn’t likely to save you money or help you get out of debt faster. You’ll probably end up paying more in interest over the life of the loan1

Conversely, refinancing to a shorter term will likely increase your monthly payment, but it will help you pay off your negative equity before your car has time to depreciate further. This can get your loan right side up faster. 

When you’re ready to finalize a refinance loan, you’ll fill out a formal loan application with the lender of your choice. The lender will conduct a hard credit check and present you with a final loan offer. (Keep in mind that you’ll need a good credit score to get the lowest refinance rates, and borrowers with bad credit may not qualify for refinancing at all.) Once you have a final loan offer, you can accept or reject it.

Upside-down car loan FAQ

How do upside-down car loans happen?

Here are the most common reasons for a car loan going upside down:

Long loan term

According to Edmonds, the most common auto loan term is 72 months, though they can get even longer. The likelihood that your car is worth what you paid for it six years later is very slim. Shorter loan terms make it more likely that you can pay off your loan before your car undergoes significant depreciation in value.

No money down

Many lenders these days will let you buy a car without making a down payment. While this may seem like a great deal, it often results in high interest rates, which increase the cost of the car loan over time. It also means that you’re taking out a loan on not just the car, but the taxes, licensing, dealership, and registration fees, as well. When you’re paying a loan on more than the car’s value — and your interest rates are higher than average — it’s much easier for your loan to go upside down. 

Excessive add-ons

When you buy a car, the dealership will typically offer add-ons like gap insurance, paint sealants, upgraded floor mats, and extended warranties. The more of these you purchase, the more you drive up the cost of your car without meaningfully increasing its value. If you don’t pay for these add-ons upfront, they can dramatically increase your overall loan amount.

Overpriced models

Whether it’s an impractical gas guzzler or a flashy sports car, overpriced cars are everywhere. These kinds of models tend to depreciate faster because buyers aren’t prepared for their high price tag and maintenance fees. Flashy or impractical cars are also much harder to resell. When you’re purchasing a car, try to be as pragmatic as possible. Also be sure to get quotes from a few dealerships before you pull the trigger. 

How can I avoid an upside-down car loan in the future? 

The best way to get out of debt is to avoid going upside down on your loan in the first place. Here are a few key prevention measures.   

1. Own equity in the car

Instead of taking out a loan for the full value of the car, borrowers should put a sizable lump sum toward the down payment. If you put 20% down at the time of purchase, for example, you’ll own 20% positive equity in the car straight away. That makes your loan less likely to go upside down. 

2. Pay taxes and fees upfront

When you purchase a vehicle, it’s not just the value of the car that you need to factor into your budget. You’ll also have to pay loan origination fees, title and registration fees, and taxes. While many lenders let you roll those fees into your loan, it can be smarter to pay them outright. This will leave you with a lower loan amount and a more manageable repayment plan.

3. Do your research when purchasing

A new car begins losing value the moment you drive it off the lot. If the dealership also charged you more for your car than it’s worth, your loan will go upside down well within your first year of ownership. To avoid this scenario, do your research, compare prices, and ask for several quotes before buying. 

4. Consider your loan term carefully

Six- or seven-year loan terms can be tempting because they often come with lower monthly payments. However, a longer loan term can quickly become a disadvantage. For example, if you know you’ll upgrade your car in five years, then a seven-year loan term could mean you’ll be saddled with hefty prepayment penalties at the time of sale. 

Plus, the longer your term, the more payments you’ll make in total. That means more interest charges — and therefore a more expensive loan. As your car depreciates, your loan will get closer to going upside down. 

Does refinancing a car loan hurt my credit? 

Refinancing a car loan will have a slight negative effect on your credit score. When you apply to refinance, the lender typically checks your credit, which can result in a hard inquiry on your credit report. This hard inquiry will drop your score, but usually only by five points or less. The drop is also temporary. It will generally stop affecting your score in one year and disappear from your credit report entirely in two years. 

Refinancing itself can also affect your credit. However, a refinance loan usually replaces an existing loan with another of roughly the same amount, so its impact on your credit score is generally minimal. 

Once you’ve refinanced, your new car loan will appear on your credit report, and your loan payments will be tracked. In most cases, the potential benefits of auto loan refinancing — like lowering your monthly car payment, saving you money through a lower rate, and helping you pay off your debt faster — outweigh the potential effect on your credit score. 

Should I trade in my car when my loan is upside down?

It’s not always the best idea to replace your car when your loan is upside down. You’ll not only have negative equity on the new vehicle from the very beginning, but your overall debt will likely grow, especially if you’ve chosen to upgrade.

If you do decide to trade in your current car, however, you can limit the effect on your debt by shopping smart. Consider buying a used car through a private sale. Going through a private party helps you avoid dealership fees. If possible, also try to negotiate the car’s price down to lower than its market value.

Compare auto loans with Navient Marketplace 

Whether you’re looking for lower interest rates or longer terms, Navient Marketplace can help you find an auto loan refinance2 provider that’s right for you. In less than a minute, you can fill in a few details about your car and your financial goals, and we’ll automatically match you with refinance lenders who fit your needs. Then, you can use our platform to browse the available options, compare offers, and choose the perfect provider for you. Get started here. 

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

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