Do I Need a Down Payment to Refinance a Car Loan?
When you purchase a vehicle, it’s common to make a down payment as part of the financing process. While this isn’t always necessary, certain lenders will require a down payment in order to approve your car loan. Regardless of whether it’s required, making a down payment when you buy a car is always a smart idea since it can significantly reduce your monthly payments and minimize the likelihood that your car ends up in a negative equity situation (more on this later).
But is a down payment necessary when refinancing?
In most instances, you will not need a down payment when refinancing your car loan. However, there are certain situations when you may need to provide an upfront cash payment in order to qualify for refinancing.
When Do I Need a Down Payment to Refinance My Car Loan?
Refinancing a car loan involves replacing your existing loan with a new loan. The new loan will pay off the initial one, and you’ll only have to make payments on the new loan moving forward. In general, there are two situations where you may need to make a down payment when you refinance:
- You don’t have equity in the vehicle
- You have a poor credit history
Equity Is Required to Refinance an Auto Loan
Equity refers to the difference between the value of your car and how much you owe on your car loan. If you owe less on your loan than the vehicle is worth, you have equity in the vehicle. If your vehicle is worth less than you owe on the loan, you have negative equity (also referred to as a loan that is underwater).
There are two reasons why lenders require you to have equity in the vehicle in order to refinance:
- Refinancing replaces your existing loan with a new one – During this process, the new lender pays off your existing loan, and they wouldn’t want to pay off a loan that is more than the car is worth. This is too risky for most lenders.
- Your vehicle serves as collateral for your new car loan – In the event that you default on your payments, the lender will take possession of the vehicle and sell it to pay off the loan. However, if your car is worth less than you owe on the loan, the lender won’t be able to recoup the full value of the loan when they sell your vehicle. This is typically a nonstarter for lenders since it presents too high of a risk for them.
To find out if you have equity in your vehicle, you simply need to compare the amount you owe on your loan to the current value of your car. You can look up the value of your vehicle on websites such as Edmunds or Kelley Blue Book. You’ll need to enter a variety of information about your car, such as the year, make, model, mileage and condition, and you’ll receive an estimate on its approximate value. As long as the remaining balance on your loan is less than this approximate value, you have equity.
If you don’t have equity, you can still potentially qualify for refinancing. However, the lender will most likely expect you to put enough money down at the time you refinance reach a place where you have equity in the vehicle.
Poor Credit History Can Sometimes Be Offset by a Down Payment
When you apply to refinance your auto loan, the lender will look at your credit history. Having a good credit score is one of the most important criteria for refinancing your car loan. In general, the better your credit score, the more likely you are to qualify for a significantly lower interest rate as part of your refinance.
If you have a poor credit history, you may be viewed as a higher risk to the lender. However, it may still be possible to refinance in these situations, especially if you’re willing to provide a down payment. A down payment will lower the value of the loan, which should lower the lender’s risk. This will often improve the likelihood that you get approved for refinancing.
This situation is much less common than having negative equity. Since you were approved for the initial loan, your credit was good enough at that time to qualify. If you’ve been making your monthly payments on time, your credit score may have potentially improved since the initial loan, which will help you qualify (and potentially unlock a lower interest rate). At the very least, you are unlikely to have worse credit than when you secured the initial loan if you’ve been making your payments on time. This will increase the likelihood you’ll be approved by a lender.
iLending Makes Car Loan Refinancing Easy
Buying a car is exciting, but it’s also expensive. Between rampant inflation and the supply chain shortages associated with computer chips used in vehicles, the cost of a car has risen exponentially in recent years. Unfortunately, this has left many people struggling financially due to a burdensome car loan that comes with a high interest rate and a monthly payment which eats up a substantial portion of your budget. Often, refinancing your car loan can be an effective way to lower your interest rate, save money and free up much needed cash in your monthly budget.
At iLending, we’re committed to delivering an amazing experience throughout the refinance process. Our exclusive You First Approach™ makes car loan refinance easy and hassle free.
To ensure we clearly understand your goals for the refinance process, we’ll pair you with a personal loan consultant who will listen carefully to your needs and assist you every step of the way. Your loan consultant will shop around for you to find the best possible options. With our vast network of nationwide and local lenders, we’re able to secure you the best possible rate for your specific situation.
Once we’ve identified the best loans, we’ll review them with you to make sure you understand your options. Your loan consultant will guide you to a decision that makes the most sense to achieve your goals. We’ll then take care of all the paperwork for you, making the process as easy as possible.
Our You First Approach™ not only makes your life easier, but it helps empower your financial freedom. On average, our customers are able to lower their car loan interest rate by 7-8% and save approximately $145 a month. This money can help you pay down other debt, save for a trip, make improvements on your home, or anything else which you may need to pay for.
Apply now to get the refinance process started. Unlock your financial freedom today.
What would you do with an extra $148* in your pocket?
