What to do When Your Auto Loan is More Than Your Vehicle is Worth
No borrower wants to be upside down on a loan. This condition (known as negative equity) exists when the amount you owe is higher than the current value of your vehicle. Instead of having positive equity that would remain in your pocket if the car was sold, a borrower with negative equity would owe the bank money if the vehicle were sold.
An upside-down loan is a relatively uncommon situation. But it can occur, especially if you made a low down-payment on the car or had longer than usual loan payback terms. If you have negative equity, getting a refinance loan becomes much more challenging. Lenders are generally more reluctant to approve you for a refinance in this situation.
Even if the lender takes the car back, it might not sell it for what remains on the loan. Because this increases the lender’s risk, many lenders steer clear of approving refinances in this situation. In the eyes of a lender, a borrower who owes more on a car than the vehicle is worth is more likely to default on the loan.
Although negative equity makes refinancing more complicated, it is not impossible. For example, having a solid credit profile might help lenders overlook your negative equity and take a chance on approving a car loan refinance for you. Or, if you are able, you could consider paying down the loan until you get back to a situation where you have positive equity again. At that point, you should have better odds of refinancing into a loan with a better interest rate.
Finally, if your lender will at least consider refinancing a portion of your loan, you could consider getting money from somewhere else (such as through a personal loan) to cover the rest.