Most banks will not refinance a car loan where you owe more than the car is worth, but some credit unions and online lenders do

When you owe more on your car than it would sell for, you are underwater or upside down on the loan. Most traditional banks — Chase, Bank of America, Wells Fargo — will decline to refinance this loan because they see it as higher risk. If you stopped paying, they would recover less money by selling the car than you still owe them.

Some credit unions and online lenders will refinance underwater car loans, though the terms are usually less favorable than a standard refinance. You will typically pay a higher interest rate, and the lender may require you to pay down part of the balance first. The amount you are underwater matters: being $2,000 upside down is easier to refinance than being $10,000 upside down.

The reason to refinance an underwater loan is usually to lower your monthly payment or shorten the loan term if your credit score has improved since you took out the original loan. Refinancing does not erase the underwater amount — it just moves the debt to a new lender with different terms.

Key Takeaways

  • Credit unions are more likely than banks to refinance underwater car loans, especially if you are a member in good standing.
  • Online lenders like Lightstream, LendingClub, and Upgrade sometimes refinance underwater loans, but will charge higher rates than for standard refinances.
  • You may need to pay down part of the loan balance yourself before a lender will refinance, or accept a higher interest rate to offset the lender's risk.
  • Your credit score, income, and how much you are underwater all affect whether a lender will say yes and what rate they will offer.

Credit unions are your strongest option for an underwater refinance

Credit unions refinance underwater car loans more often than banks do, partly because they are member-owned and can take longer-term views of risk. If you have been a member for a while and have a decent payment history, they may refinance even if you are significantly underwater. Some credit unions will refinance loans from other lenders; others will only refinance their own loans.

Start by calling your own credit union and asking directly whether they refinance underwater auto loans. If they do, ask what the current rate is and whether being underwater changes it. If your credit union will not do it, ask whether they can refer you to another credit union in their network that does — many credit unions participate in shared branching and lending networks.

Credit unions typically charge lower rates than online lenders for the same risk profile, so this is worth pursuing first even if it takes a phone call or two.

Online lenders that may refinance underwater loans

Several online lenders will refinance car loans where you owe more than the car is worth. Lightstream (owned by SoFi) refinances underwater loans for borrowers with good credit, though the rate will be higher than for someone with positive equity. LendingClub and Upgrade both offer auto refinancing and consider underwater borrowers, though approval is not may provide.

The process is faster than a credit union — you can often get a decision within hours — but the rates are typically higher. Online lenders pull your credit, verify your income, and confirm the car's value using NADA Guides or Kelley Blue Book. If the gap between what you owe and what the car is worth is too large, they will decline.

Before you explore to an online lender, check their rate by entering your information on their website. This usually involves a soft credit pull that does not affect your credit score. explore to multiple lenders within a two-week window counts as a single inquiry, so you can shop around without penalty.

What lenders look at when you are underwater

A lender deciding whether to refinance an underwater loan focuses on three things: how much you owe versus what the car is worth, your credit score, and your income relative to your debt.

The loan-to-value ratio (LTV) is the amount you owe divided by what the car is worth. Most lenders will not refinance if your LTV is above 125 percent — meaning you owe 25 percent more than the car's value. Some will go to 130 or 140 percent if your credit score is very good and your income is stable, but this is rare. You can find your car's value using Kelley Blue Book or NADA Guides by entering the year, make, model, and mileage.

Your credit score matters more when you are underwater because the lender is taking on extra risk. A score of 700 or above makes refinancing much more likely. A score below 650 makes it very difficult, even with a credit union. If your score has improved since you took out the original loan, that is your strongest argument for refinancing.

Paying down the loan before refinancing

If you are deeply underwater, a lender may ask you to pay down part of the balance yourself before they will refinance. This is called a cash-out reduction or sometimes a paydown requirement. For example, if you owe $20,000 on a car worth $16,000, a lender might ask you to pay $1,000 or $2,000 toward the principal first, bringing the LTV down to a level they will accept.

This is a real cost to refinancing, and it is worth calculating whether the monthly savings justify it. If your current payment is $400 a month and refinancing would drop it to $350, paying $2,000 upfront means you need to keep the car for at least 40 months just to break even. Factor in how long you plan to keep the car before deciding whether to pay down the balance.

Some lenders will let you roll the paydown amount into the new loan instead of paying it in cash, but this defeats the purpose — you are just moving the debt around and staying underwater.

How to compare refinance offers when you are underwater

When you get a refinance offer, look at the total interest you will pay over the life of the loan, not just the monthly payment. A lower monthly payment sometimes comes from extending the loan term, which means you pay more interest overall.

Use an auto loan calculator to compare offers side by side. Enter the new loan amount, the interest rate, and the term in months. Calculate the total interest for each offer. A refinance that saves you $50 a month but costs you $1,500 more in total interest over five years is not a good deal.

Also check whether the lender charges a prepayment penalty if you pay off the loan early. Most do not, but some do, and this can matter if you plan to pay the car off faster or sell it before the loan term ends.

Alternatives if no lender will refinance your underwater loan

If you cannot find a lender willing to refinance, you have a few other options. You can continue making payments on your current loan and wait until you are no longer underwater — this happens as you pay down the principal and the car depreciates less steeply. You can also make extra payments toward principal to speed up the process, though this only works if your current loan does not have a prepayment penalty.

Another option is to trade in the car at a dealership and roll the underwater amount into a new car loan. This is usually a bad financial move because you are financing a larger amount on a new vehicle, but it is an option if you need a different car anyway.

If you are struggling with the payment itself, contact your current lender and ask about a loan modification — a temporary reduction in the payment or an extension of the term. This is different from refinancing and does not require a new lender to approve you.

Frequently Asked Questions

How much underwater can I be and still refinance?

Most lenders will refinance if you are underwater by 20 to 25 percent — meaning your loan-to-value ratio is 120 to 125 percent. Some credit unions and online lenders will go to 130 or 140 percent if your credit score is strong and your income is stable. The exact limit depends on the lender and your individual situation.

Will refinancing an underwater loan hurt my credit score?

Refinancing involves a hard credit inquiry, which temporarily lowers your score by a few points. However, if you refinance within a two-week window, multiple inquiries count as one. Your score will recover within a few months, and the long-term benefit of a lower interest rate usually outweighs the temporary dip.

Can I refinance an underwater car loan with bad credit?

It is very difficult. Most lenders require a credit score of at least 650 to refinance an underwater loan, and many prefer 700 or higher. If your score is below 650, focus on improving it first by paying bills on time and reducing other debt, then revisit refinancing in six to twelve months.

What if my car is worth less than I think?

The lender will use their own valuation, usually from Kelley Blue Book or NADA Guides, not your estimate. If you think your car is worth more, get a professional appraisal from a mechanic or dealer — this costs $100 to $200 but can help if the lender's valuation seems wrong. Bring the appraisal when you explore.

Should I refinance if it only saves me $30 a month?

Only if the loan term stays the same or gets shorter. If the new loan is longer, you will pay more interest overall even though the monthly payment is lower. Calculate the total interest paid over the full term before deciding. A $30 monthly saving is not worth it if you pay $2,000 more in total interest.