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Do You Need a Down Payment to Refinance a Car?

Do You Need a Down Payment to Refinance a Car?
Austin Kilham
Austin KilhamUpdated February 28, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When you refinance a car loan, you take out a new loan to pay off your old one—ideally one with a lower interest rate or better terms. For your first auto loan you likely had to make a down payment. So now you may be asking yourself, do I need a down payment to refinance my car? With refinancing, lenders typically don’t require a down payment. After all, you qualified for the original loan, and it’s possible you’ve already paid off a substantial portion of it. So a down payment generally isn’t necessary.But there are other requirements for a car refinance. Read on to learn how down payments work, plus the other conditions you may need to meet for refinancing. 

What Are Down Payments?

A down payment is one of the car loan basics. In other words, it’s one of the ways car loans work. When you first take out a car loan, you may pay some money upfront toward the purchase of the car. This is a down payment, and it usually represents a percentage of the vehicle cost. There are no set rules with down payment amounts, so you can put down what you like. However, the average down payment is typically 10% to 20% of the cost of the car. So if you’re buying a car for $35,000, you might put down $3,500 (10%) or $7,000 (20%).Down payments can serve a few different purposes. For lenders, a down payment reduces their risk because they don’t have to loan out as much money. Plus, the borrower may be less likely to default on the loan since they’ve put their own money into the car. Down payments can be beneficial for borrowers, too — particularly when it comes to interest. The auto loan interest explanation works like this: If you put down money on  a car loan, the lender is taking on less risk by lending to you. The more you put down, the less risk for the lender, and the lower the interest rates they might offer you. Over the long term, this could save you a considerable amount. 

Down Payments When Refinancing Your Auto Loans

Now that you understand how car down payments work, you may still be wondering: Do you need a down payment to refinance a car? As mentioned, you typically don’t have to make a down payment when refinancing. That’s because a lender has already determined your creditworthiness. What’s more, if you made a down payment the first time around and you’ve kept up your loan payments, you may have significant equity built up in your vehicle. That makes offering a new loan much less risky for another lender. 

Understanding Equity

Equity is the difference between how much your car is worth (its resale value) and how much you still owe on the loan. In other words, it’s a measure of how much of your car you actually own. Equity can be positive or negative. When your car is worth more than the amount you owe on your loan, you have positive equity. However, when the amount you owe is more than the value of your vehicle, you have negative equity. This is also known as being upside-down or underwater on your car loan. Negative equity could be caused by anything that significantly lowers the resale value of your car, such as damage to the vehicle, very high mileage, or wear and tear. To calculate the equity in your car, first figure out the amount you still owe your lender. You should be able to find this information on your most recent monthly auto bill. Then try to determine how much your car is worth. This can be tricky, but you can generally get a good estimate through free online resources, such as Kelley Blue Book and Edmunds. Type in your vehicle year, make, model, or vehicle identification number (VIN), and these sites will give you a value estimate based on the sales of thousands of used cars across the country. Subtract the amount you owe on the car loan from the estimate of what the car is worth to get an idea of how much equity you’ve built up. 

Equity When Refinancing an Auto Loan

Why does equity matter when refinancing your car loan? It goes back to the risk your lender is taking on. The lender wants to  be sure that the car is worth enough that they’ll be able to recoup their loss if you default on the loan.  If you are underwater on your first loan, it may be difficult to secure an auto loan refinance because the resale value of the car is worth less than the amount you owe. In this situation, you may be able to pay extra toward your loan to reach positive equity. At that point, a lender may consider a refinance. Recommended: When Should or Shouldn’t You Refinance a Car Loan?

Requirements for Refinancing an Auto Loan

Lenders typically have a list of requirements for refinancing an auto loan. Here’s what’s generally needed:
  • Your identification, including proof of residence, driver’s license, and social security number. 
  • Your auto insurance documents 
  • Proof of income. Lenders may ask you for pay stubs or tax returns and they might want to contact your employer. 
  • Your car should be less than 10 years old 
  • You should owe more than $7,500 on your current loan. Otherwise the lender likely won’t want to offer a loan for such a small amount.
Your lender will also typically do a credit check. Borrowers with higher credit scores are more likely to secure a loan with good interest rates and better terms. It may be more difficult for borrowers with poor credit to qualify for a loan. Finally, the lender may look at how much of your available credit you are using, which is also known as your debt-to-income ratio. This metric compares how much money you earn each month to your monthly debt obligation. Ideally, lenders prefer a ratio that’s less than 36%. The higher the ratio, the more they might worry that you’re overextended, which could make them hesitant to offer you a new loan. 

Things to Consider When Refinancing Your Auto Loan

The time may be right for you to refinance your car loan if interest rates have dropped and/or your financial situation has improved. If you’ve paid down other debts or your credit score has gotten a boost, you may qualify for a new loan with a lower interest rate. You may also decide to seek refinancing if you want to make your monthly payments more manageable. By extending your loan terms, you could lower how much you owe each month. However, you’ll be paying interest for longer, which can ultimately increase the cost of your loan. These are some of the pros and cons of refinancing a car you’ll want to consider carefully.

Refinancing Your Auto Loan With Lantern

The answer to the question of “Do you need to put money down to refinance a car?” is no. But what you will want to do if you decide to pursue refinancing is to shop around to a variety of lenders to get the lowest interest rate and best terms available. Lantern’s refinancing tool can help you quickly and easily compare rates from top lenders and also see if you prequalify for a loan. Once you decide on a loan, our lending partners will take care of paying off the old loan and retitling your vehicle.

Frequently Asked Questions

Do you have to put money down to refinance a car?
Is it beneficial to have a down payment when refinancing your car?
How does not having a down payment when refinancing your car impact your auto loan?
Photo credit: iStock/kate_sept2004
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About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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