When Is Refinancing an Upside-Down Car Loan a Bad Decision?

When Is Refinancing an Upside-Down Car Loan a Bad Decision?

When Is Refinancing an Upside-Down Car Loan a Bad Decision?

You don’t necessarily have to hand over your keys to improve your LTV. According to the RateGenius 2021 State of Auto Refinance report, approved borrowers shaved their interest rate by 5.5% on average. This helped the average borrower save about $990 on an annual basis. Now, imagine if you applied these savings to your loan.

Refinancing can help you land a lower interest rate and, in turn, a lower monthly payment. Then you could installment loans in North Carolina apply the cost savings to your existing loan and improve your LTV. And, of course, you get to keep your car.

  • Your current loan has a high interest rate.
  • You had bad credit when you took out your existing loan, but it has since improved.
  • You aren’t pressed to sell your car.

Although refinancing can help borrowers get better interest rates and save money, it’s not always the best route if your car loan is upside-down.

For starters, you have to qualify for auto loan refinancing. While you can still qualify with an upside-down loan, it’ll depend on your lender’s preferences and the other areas of your financial profile.

According to RateGenius data from 2015 to 2019, approximately 90% of approved refinance loan applicants had an LTV of 123% or lower. So, if your LTV is higher, you might have a harder time qualifying. That said, a strong credit score or debt-to-income ratio could help you offset a high LTV.

Also, if you’re set on trading in your vehicle and have the liquidity to pay off the negative equity, then it might make more sense to start fresh with another vehicle instead of refinancing.

3 Tips for Building Positive Equity in Your Car

You can trade in an upside-down car. You can also refinance an upside-down car loan. But these aren’t your only options. Paying down your current loan will improve your LTV and build positive equity in your car. Here are a few tips to get started.

1. Get a part-time job or side hustle

Not everyone has the time or energy to get a part-time job – that’s understandable. However, if you have a few hours to spare each week, another source of income can help you make extra payments. A little extra money goes a long way to paying off a loan.

2. Cut back on unnecessary expenses

While we can’t give ourselves a raise, we do control our spending habits. Freeing up some of your income by cutting back on “want” purchases can help you pay off your loan faster. There are plenty of budgeting apps and templates you can use to identify areas of overspending or unnecessary expenses.

3. Use cash windfalls responsibly

Every now and then, we benefit from unexpected financial fortune. A spot bonus for going the extra mile at work. A generous cash gift from a relative for a birthday present. An unexpected tax return. While you can’t necessarily predict our next monetary windfall, you can be prepared to use it responsibly.

If you have negative equity in your car and you happen to receive a little extra cash, consider using it to pay down your loan.

More Debt Is Not a Good Fix For Negative Equity

If you’re really scrambling, you might be tempted to take out a personal loan or open a credit card with a temporary zero-interest promotion and use it to pay off some of your auto loan. While this technically reduces your negative equity, it doesn’t fix your debt situation. Taking this route is more likely to hurt you later on, so focus on the other alternative we’ve outlined instead.

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