Yes, you can refinance an auto loan even if you have negative equity. However, the lender is going to lend based on the vehicle’s value. If the lender determines the vehicle is worth $10,000, and you owe $20,000, be prepared for a shock.

The lender may tell you you have been approved for a refinance auto loan, but they may also let you know that they are only willing to lend $11,000 on that particular vehicle (or less if your credit is poor). That would mean you would need to write a check for $9,000 just to refinance your car loan.

How did it get like this?

It used to be that if you had good credit, you could lend up to 150% of the vehicle’s value. Many lenders like Wells Fargo would do 145%+++ which meant they would finance 145% of the vehicles value plus sales tax & licensing, plus warranty, gap, and other “back end” products for vehicle purchases.

Many people owed so much money, that they could not refinance or trade their vehicles so they just let the car go back to the lender via repossession. The lenders who did these types of loans were the hardest hit by the financial slowdown because when the vehicles sold at auction after the repossession they were not able to recover enough of their initial investment. Many of the auto lenders (including Wells Fargo) have either stopped doing auto loans or have gone under.

All of the lenders that still do refinance auto loans have tightened up their lending guidelines and loan-to-value ratios. Consequently, if you have much better credit than when you originally obtained your auto loan then you can always look to refinance that loan for a better interest rate. That being said, we recommend people with poor credit hold of on attempting to refinance until the market picks up.

If you want to try some auto loan refinance websites, we recommend JumpStartMyCredit.com and Credit.com.

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This entry was posted on Thursday, May 14th, 2009 at 5:30 PM and is filed under Auto Loan Refinance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.