Auto Refinance Tip
Being upside down on your auto loan is actually normal. Lenders expect that your car's worth will be less than the loan amount because car's depreciation schedule is quite accelerated. LTV limits are often 120%+.


 
Bookmark and Share

Auto Refinance Upside Down

My car is worth less than the amount of my loan. Help!

Overview
My car is underwater – can I refinance my loan? The answer is: Absolutely. 

Unlike the problem of having your house underwater, this problem is solvable.  In fact most auto loans involve a loan-to-value (LTV) metric that is above 100%.  Why?  Virtually all automobile value depreciates at a much faster rate than the loan size. 

Cars are a depreciating asset
Think about it – you’ve probably heard that a new car depreciates 10% just by driving it off the lot.  Because it is no longer “new”, it can’t be sold at the premium it fetched while sitting in the showroom.  In this example, the car lost 10% of its value, but the loan amount stayed the same. This is in stark contrast to a home mortgage, where (in most cases) the house will appreciate. Because houses tend to appreciate (historically speaking) banks tend to make loans that are less than 100% LTV. Currently many banks only do 75% LTV mortgage loans.

Let’s look at a real-world example.
In 2008, a consumer buys a reputable car known to hold its value - a brand new 2007 Acura TL for $41,000. 

  • This sales figure includes tax, title, and licensing fees. 
  • Consumer decides to finance the entire amount with 8% interest rate.

In 2010, the consumer decides to pursue an auto refinance loan, but is concerned that the vehicle is not worth as much as the current portion of the loan. In this case, the auto could be upside down. a consumer buys a reputable car known to hold its value - a brand new 2007 Acura TL for $41,000. 

  • Kelly Blue Book appraises this car (excellent condition, 30K miles) for $22k
  • Assuming 24 months have passes, the principal portion of the loan is $26.5KThis sales figure includes tax, title, and licensing fees. 
  • Consumer decides to finance the entire amount with 8% interest rate.
In this scenario, the loan amount ($26.5K) is greater than the value of the car ($22K).  Indeed the auto is “underwater”.  LTV in this example is  120%.  LTV is calculated as such:  Loan amount/appraisal.  $26.5K/22.0K = 1.20.

Refinancing an upside down auto loan is "normal"
Often times in auto refinance the consumer will be upside on the loan because of the nature of an automobile’s depreciation schedule.  The car’s value, as appraised by Kelly Blue Book or NADA, will likely be less than the loan amount, especially in the early years of the loan.  Lender’s are aware of this phenomena, and adjust for this by allowing loans to range between 100% and 135% LTV.  For a bank, a higher LTV loan is riskier, but if the borrower is creditworthy then this risk can be mitigated.

What to do if you are REALLY, REALLY, REALLY upside down
What if your car has a higher LTV than the maximum allowed by the lender.  In this case, if the bank deems that you are creditworthy, but the vehicle LTV is out of bounds, then it is possible to apply additional money down to cover the LTV disparity.  While this option is not usually very appealing for cash-strapped consumers, it can be a wise play for those consumers who are looking to lower their rate and reduce the total amount of interest paid on their loan.  Generally speaking, we recommend that you try to do this in order to accelerate payment of the loan in total, thus reduce the amount of interest paid.

 

RoadLoans.com works with all credit types!