You might still obtain an approval for a refinance if you owe more than your car is worth depending on your overall credit and how much you're asking to borrow. Depending on credit, you may obtain an approval for up to 120 percent of your vehicle's bank-determined value.
Credit Factors
Whether you can obtain an approval for your refinance when you owe more than the vehicle's value depends on your credit and is known as your loan-to-value ratio. Lenders review your past payment history, paid accounts and credit score. Expect to prove your income and provide your housing costs so your lender can determine your debt-to-income ratio, which is the amount of money you pay out each month versus the amount of money you have coming in. If you have excellent credit, you might obtain a loan approval of up to 120 percent of the vehicle's bank-determined value. If you have poor credit, you might obtain an approval for as little as 60 percent of the vehicle's value.
Down Payment Option
Depending on the amount you're trying to refinance, you might have to provide a down payment to correct your loan-to-value ratio. Your potential auto loan provider may request the down payment as a term of loan approval. Whether your lender does or not, consider offering enough of a down payment to cover your negative equity. Otherwise, you might have issues in the future when trying to trade or sell your vehicle privately. If you don't provide a down payment during a refinance to decrease negative equity, you'll likely need a down payment later, unless you keep your car until the loan is satisfied.
Other Options
If you can't obtain a loan approval because you owe too much money on your current car loan, consider trading your vehicle toward another purchase. You might be able to decrease your negative equity if you purchase a new car with discounts or rebates. Rebates are automatic discounts offered from a vehicle's manufacturer and can save you thousands of dollars. Most states also offer sales tax savings when you trade in an old car as part of a new car purchase, meaning your trade value is reduced from the new car's taxable price before applying tax. If you live in an area with a high tax rate, you might save a few thousand dollars in sales tax charges.
Considerations
You may benefit from refinancing an upside-down vehicle loan without a down payment if your interest rate has improved. Unless your current loan has an interest rate of zero percent, you're paying interest each day on your loan, known as your loan's per-diem amount. Your per-diem amount might exceed $10 per day if you have a high interest rate. Determine your overall payback costs to decide if refinancing without a down payment is worthwhile. Once you have an approval and know your interest rate for your refinance, multiply your monthly payment by your loan term to determine how much you'll pay back for your loan over time. Do the same with your current loan.
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