Do You Need a Down Payment to Refinance a Car Loan?

Refinancing a car involves replacing your current auto loan with a new one. Doing so may help you reap benefits like lowering your overall loan costs, reducing your monthly payment or switching to a lender with better customer service. 

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But can you make a down payment when refinance a car? Should you?

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While down payments are common when purchasing vehicles, they’re rare during the refinancing process. Here’s what you should know. 

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Key takeaways

• You don’t need a down payment to refinance a car.
• Although it’s not required, making a down payment could help you qualify for a refinance loan.
• Down payments during refinancing can be especially helpful for people with bad credit and those with negative equity in their vehicles.
• When comparing refinance rates, use an auto loan calculator to run the numbers on a loan with and without a down payment, which can affect the loan amount and interest rate.

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Is a down payment required to refinance?

Typically, you don’t need a down payment to refinance a car. Instead, lenders usually provide a loan amount that’s large enough to cover your entire outstanding balance so you can pay off your old loan in full. In some cases, they even allow you to borrow more than you owe and pull the difference out in cash. 

However, there may be rare instances where a lender requires a down payment, such as if you need to offset negative equity or bad credit to qualify. 

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How equity comes into play

Equity is an important factor when refinancing an auto loan. If you’re underwater on your current loan, you owe more than the car is worth — that’s negative equity. In cases like this, you may need a down payment to cover the difference between the car’s value and your loan balance.

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For example, if your car is worth $15,000 but you owe $18,000, a lender may require a down payment of $3,000 so the loan amount doesn’t exceed your vehicle’s value. 

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While not a down payment per se, refinancing may also involve upfront fees you’ll need to pay to re-register your car and transfer the title. Additionally, some lenders charge transaction fees to process loans, also known as application or origination fees.

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Down payments for bad credit refinancing

If you have bad credit, you can make a down payment when refinancing a car. It could make your application stronger by offsetting a lower credit score.

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Lenders look at your credit history and credit score as part of reviewing your refinance application. A lower credit score means more risk for the lender. A down payment, on the other hand, means less risk for the lender because you’ll need to borrow less. If your credit score is below the lender’s expectations, making a down payment on your refinance loan might sway their approval decision in the other direction.

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Can you make a down payment when refinancing a car?

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You don’t need a down payment to refinance a car with most lenders, but you can choose to make one to reduce your loan balance. For example, if you owe $20,000, you could pay $5,000 upfront, leaving just $15,000 to refinance. This strategy has its benefits and drawbacks:

Pros

• Increased equity: Paying down your balance boosts your equity in your car, improving your loan-to-value (LTV) ratio which can help you secure a lower interest rate.
• Lower interest costs: A smaller loan balance can reduce the interest you pay over the life of the loan.
• Reduced monthly payments: The smaller loan amount can also help you secure lower monthly payments. 
• Faster payoff: You may be able to shorten your term and pay off your car loan balance faster.

Cons

• Reduced liquidity: Paying down the balance will leave you with less financial flexibility for other needs.
• Opportunity cost: The down payment funds you use to reduce your balance might generate a better return if invested elsewhere.

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What is required to refinance a car loan?

Each lender has its own criteria you’ll need to meet to refinance a car loan. Some of these key factors typically include:

• Loan-to-value ratio (LTV): The loan may need to be less than the car’s market value, although some lenders will approve LTVs of up to 125%.
• Credit score: There may be a minimum credit score requirement (such as 640). Higher credit scores may help you get lower rates.
• Debt-to-income ratio (DTI): Calculate your DTI by dividing the sum of your monthly recurring debt payments by your monthly gross income and multiplying it by 100. Lenders often require your DTI to be under a certain limit (such as 50%).
• Vehicle condition: Restrictions may apply based on a car’s age, mileage, make, model, and whether it’s for personal or commercial use. High-mileage vehicles (with more than 100,000 miles) may not qualify with some lenders.
• Loan balance: Your outstanding loan balance must fit within the lender’s minimum and maximum loan limits. For example, more than $5,000 but less than $100,000.

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Finding the best refinancing rates

To find the best rates for a refinance, shop around and collect multiple quotes. Once you have a few, review them alongside your current loan, comparing the interest rates, terms, monthly payments, and fees. Use our auto loan refinance calculator to calculate the overall cost of each loan and compare them to find the right fit. 

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Remember that although you don’t need a down payment to refinance a car, including one could affect whether you qualify and what your loan amount may be. When comparing total loan costs, include potential down payments in your calculations.

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Deciding how and when to refinance often boils down to your credit profile and the equity you have in the vehicle. If your score has improved, or if you have positive equity, it could be a great time to refinance. If you have bad credit, or you’re underwater on your loan, you may need to work harder to make your refinance loan application as strong as possible.

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Don’t forget to weigh all the pros and cons of refinancing before making your decision. A lower monthly payment doesn’t always mean a better deal. If you extend your loan term, it’ll often lower your monthly payment amount but increase your overall costs.

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FAQs

Still have questions? Check out these FAQs about auto loan refinancing and down payments. 

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Can I refinance without a down payment?

Yes, it’s common to refinance a car without making a down payment. Lenders usually provide a loan amount large enough to pay off the entire existing loan. However, some may require a down payment if you don’t meet their LTV or other eligibility requirements. 

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What is the minimum amount to refinance a car?

Many auto loan refinance lenders require borrowers to have a minimum outstanding loan balance that exceeds a certain limit, often between $5,000 and $10,000. However, not all do. It varies by lender.

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How much does an auto refinance cost?

A refinance typically costs a few hundred dollars in fees, but it varies depending on the lender and state. For example, you may need to pay an origination fee on the new loan, a title transfer fee, and a re-registration fee. 

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Is it worth it to refinance auto loans without a down payment?

Refinancing an auto loan without a down payment can be worth it if it offers you a benefit over your current loan that’s worth the costs of the new loan. For example, if you qualify for a lower interest rate with another lender, refinancing could reduce your monthly payment amount and overall costs.

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Does making a down payment lower my interest rate when refinancing?

It might. A down payment reduces the amount you need to borrow and improves the loan-to-value ratio, which could help you qualify for lower interest rates.

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