If you have negative equity on your car loan, you might be wondering if you can refinance your car. The short answer is yes, but there are a few things you need to consider before you start the refinancing process.
Understanding Negative Equity
Negative equity, also known as being “upside down” on your car loan, occurs when you owe more on your car than it is worth. Negative equity can occur due to various factors, such as:
Depreciation: As soon as you drive a new car off the lot, it starts to lose value. This means that if you have a long loan term, you could end up owing more on your car than it is worth.
High-interest rates: If you have a high interest rate on your car loan, you may be paying more in interest than you are paying towards the principal. This can cause your loan balance to grow faster than your car’s value.
Low down payment: If you didn’t make a substantial down payment when you purchased your car, you may have started your loan with negative equity.
How Negative Equity Affects Your Ability to Refinance
When you refinance your car loan, you are essentially taking out a new loan to pay off your existing loan. If you have negative equity, this means that you will need to borrow more money than your car is worth to pay off your current loan. Lenders are generally hesitant to lend more money than a car is worth, so having negative equity can make it more difficult to refinance.
Additionally, having negative equity can affect the interest rate and terms you are offered when you apply to refinance your car. Lenders may see you as a higher-risk borrower because you already owe more on your car than it is worth. This means that you may be offered a higher interest rate or less favourable loan terms than someone who has positive equity in their car.
Options For Refinancing With Negative Equity
If you have negative equity on your car loan, you still have options for refinancing. Here are a few things you can do:
Make a larger down payment: If you have negative equity because you didn’t make a substantial down payment, you could consider making a larger down payment before you refinance. This will reduce the amount of money you need to borrow and could make it easier to get approved for a new loan.
Wait to refinance: If you don’t need to refinance your car immediately, you could wait until you have more positive equity in your car. You can do this by making extra payments towards your principal or waiting until your car has depreciated less.
Find a lender that specialises in refinancing with negative equity: Some lenders specialise in refinancing car loans with negative equity. These lenders may be more willing to work with you and offer more favourable loan terms than traditional lenders.
Consider a personal loan: If you can’t find a lender to refinance your car loan, you could consider taking out a personal loan to pay off your car loan. While a personal loan will typically have a higher interest rate than a car loan, it may be easier to get approved for a personal loan than a car loan with negative equity.
Final Thoughts
Refinancing a car loan with negative equity can be challenging, but it’s not impossible. If you have negative equity, it’s important to explore all of your options and find a solution that works for you.
Whether it’s making a larger down payment, waiting to refinance, finding a specialised lender, or considering a personal loan, there are ways to improve your financial situation and get your car loan back on track. Just remember that refinancing with negative equity may not always be the best option, and you should carefully weigh the pros and cons before making any decisions.
