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Do I Need a Down Payment To Refinance my Car Loan?

Finance | 03/14/2022 23:00

When you buy a car, a down payment is usually part of the routine. Having a down payment when you buy a car can reduce your payments significantly and also help ensure that your car loan doesn’t end up underwater.

But what about when you refinance a car? Do you need a down payment then? Today we are answering all of your questions about down payments, equity, and how you can refinance car loans.

Is Equity an Auto Refinance Requirement?

First up, let’s talk about down payments, equity, and how they relate to each other.

A down payment is money you pay upfront for the car you are buying (essentially your first payment on your new car). Most of the time lenders require down payments, but even if it is not a requirement, it might be a good idea. (Providing a down payment will decrease your monthly payments and reduce the possibility of your car loan becoming underwater.)

Equity on the other hand is the difference between your auto loan's balance and how much your car is currently worth. 

Down payments are not required for an auto refinance, but equity is required. This simply means that you do not need to put down any additional money on your loan, but the lender wants to know that there is value in the car that you are refinancing. 

Car loans are secured loans, meaning that if you defer on your car payments and can no longer afford them, the bank can take your car as collateral. If you owe more on the car than the car is worth, the lender will ultimately lose money. And that is their biggest no-no. So unless your car has equity, they will not risk refinancing your car loan.

So how do you know if your car has equity? Look at the current amount that you owe on your loan, and compare it to the current value of your car. You can determine the current value of your car by using a website such as Edmunds or Kelley Blue Book. These websites take into account your car’s make, model, year, condition, and mileage, and can give you an approximate value. If you owe more on your car than it is valued at, you are most likely in an underwater loan and will have a difficult time refinancing your car loan. But if you owe less than the car is worth, your car has equity and will likely qualify for refinancing. 

What Are The Other Requirements To Refinance Your Auto Loan?

Your car has to be worth more than you owe in order to refinance auto loans. But what are some other requirements for auto refinance?

A Good Credit Score

Having a good credit score is important when it comes to refinancing your car loan. It’s not impossible to refinance your car loan with a less than great credit score, but it is harder, and it might not be as worthwhile. Credit scores take five main categories into account:

  • Payment history (35%) 

  • Amounts owed (30%) 

  • Length of credit history 

  • Credit mix (10%) 

  • New credit (10%) 

The most important categories of your credit score are the payment history and the accounts owed, making up 65% of your score. Focusing on improving these areas can help boost your credit score. Lenders reserve the lowest car loan APRs for those with the highest credit scores.

Your Current Loan’s Terms

There are a few terms in your current loan that will dictate whether or not you can refinance your car loan: the prepayment penalties, the time left on your loan, and your current payments.

The prepayment penalties

Some car loan agreements have prepayment penalties. After all, these lenders won’t be making as much money off of you if you leave to refinance, so they tack on extra fees to help make some extra money. This can vary greatly based on your loan. Be sure to read the fine print of your contract carefully to determine if the penalties will outweigh the savings of auto refinance. 

The time left on your loan

If you have less than a year left on your current car loan, you will have a difficult time finding a lender to refinance your car loan. Car loans are front loaded, amortized loans. This means that in the beginning of the loan, you are paying mostly interest, and towards the end of the loan, you are paying mostly principal. So the closer you are to the end of your loan, the less interest you are paying. Lenders don’t want to refinance your loan when they will not be making money off of you, so the closer you are to the end date, the less likely you are to find a lender who will refinance your car.

Your current payments

Making on time, full, consistent payments is very important for your credit score. But it is also important for lenders to see this specifically in relation to your car loan. They want to know that you consistently pay your debts and are able to handle your car payments without issue.

Where Can I Get The Best Auto Loan Refinance For Me?

If you are overpaying on your car loan (and trust us, you probably are), you may be wondering where you can get the best auto loan refinance. You want to make sure to look around at different lenders (include a mix of traditional banks, online lenders, and credit unions). You will not be able to compare actual rates and terms until you apply, but you can get a preliminary idea from customer reviews as to what to expect.

When you pick a few different lenders (aim for 3-5), apply to them all at once. When the offers start coming in, compare the following.

  • Interest rates

  • Payment terms

  • Prepayment penalties

  • Customer satisfaction ratings

  • Hidden fees

The interest rate is the most important factor in your auto refinance, but be sure to take everything else into consideration as well. When you decide which lender is best for you, you can sign and start saving!

At Auto Approve, we specialize in auto refinance, so you know we can get you the best auto loan refinance available. We have relationships with some of the best and most competitive lenders across the country. But don’t just take our word for it – our customer reviews speak for themselves (not to mention our A+ rating from the Better Business Bureau).

You do not need a down payment to refinance your car loan, but there are some other requirements you need to consider.

If you're ready to get started with auto refinancing, get your free, no-commitment quote from Auto Approve today!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.