How to Refinance an Upside Down Car Loan
Refinancing an upside down car loan can be a frustrating task. An individual becomes upside down on his vehicle when the amount owed on the car is more then the value of the vehicle. Since car loans are secured by the value of the vehicle, lenders are reluctant to refinance upside down vehicles. However, finding a lender that will refinance is worthwhile because it can lower your monthly payment. The refinance process usually requires completing an application and providing proof of income. Some lenders can give a decision on the spot, while others may need to send the application to underwriting for review. This process can take about a week.
- Difficulty:
- Moderate
Instructions
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1
Focus on extending your term. Financial institutions will often consider a refinance if you are willing to extend the loan term. For example, you can switch from a 3-year term to a 5-year term.
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2
Understand current rates. You can often negotiate your auto loan rate with lenders. Companies such as Bank Rate have loan comparisons you can view online. You can also customize the report by entering your specific zip code. Having this information will assist in the negation process.
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3
Gather information the lender may require. When refinancing your vehicle, lenders typically require a minimum of two pay stubs and possibly 1 to 2 years of tax returns if you are self-employed. Having this information easily accessible will speed up the refinancing process.
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4
Work with your current lender. Your current lender is most likely to refinance your vehicle because you have a relationship with them. Meet with a loan officer and explain why it's important to refinance your loan. From a lender's perspective, it's better for the financial institution to restructure your loan then have an issue with repayment.
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Shop other lenders. If your current lender won't refinance your loan, it's time to shop other financial institutions. When talking with other lenders, offer your entire relationship. Offer to move your savings, checking and other accounts if the lender will refinance your upside down car loan.
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If your refinance application is denied, try again in six months. If your refinance application gets denied, reapply in six months. Sometimes if the rate environment or economy changes, lenders will be more likely to grant refinances on upside down car loans.
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Tips & Warnings
Understand you may be paying a higher rate. Because refinancing an upside down car loan isn't desirable for financial institutions, you may end up paying a higher rate. But because your loan amount will be spread over a longer term, your monthly payments will be lower.
Don't be tempted to roll your negative equity into a new car. Car dealers will often allow you to roll the negative equity of your car when trading in your current vehicle. This is a privilege that will cost you money in the long run.
