What is Negative Equity | How to Refinance with Negative Equity!

What to Do When You Owe More Than Your Car Is Worth

Being underwater on your car loan—also known as having negative equity—can be a frustrating situation. It means you owe more on your vehicle than it’s currently worth. And if you're thinking about refinancing, you might be wondering, “Can I even refinance if I’m upside down on my loan?” The good news is: yes, you can refinance with negative equity, though it comes with some considerations. In this post, we’ll explain how refinancing works in high loan-to-value (LTV) situations, how GAP insurance can protect you, and why refinancing might still be a smart move.

What Is Negative Equity?

Negative equity occurs when your car’s market value is less than your loan balance. For example, if your car is worth $15,000 but you still owe $18,000, you’re $3,000 underwater. This usually happens due to:

• Small or no down payment

• High interest rates on the original loan

• Rapid vehicle depreciation (especially in the first year)

• Long loan terms (72+ months)

While it’s not ideal, negative equity is very common—especially for buyers who financed through dealerships. But it doesn't mean you're stuck.

How Refinancing Can Still Help

Even if you’re underwater, refinancing might still save you money—especially if your credit score has improved or if your current loan carries a high interest rate. A lower rate can reduce your monthly payment and slow the rate at which negative equity grows. In some cases, you might even be able to refinance into a slightly longer term, easing financial pressure month to month.

Here’s what to expect if you refinance with negative equity:

• You’ll likely need a lender that accepts high LTV ratios. Some go up to 130%, depending on your credit profile.

• Your new interest rate may be higher than if you had positive equity, since the loan is riskier for the lender.

• You may be required to carry GAP insurance, or it may be strongly recommended.

You won’t erase your negative equity by refinancing, but you may lower your interest costs and make your payment more manageable—especially useful during times of financial strain.

Why GAP Insurance Is a Must for High-LTV Loans

If you're refinancing with negative equity, GAP insurance (Guaranteed Asset Protection) is one of the smartest protections you can add. GAP covers the difference between what your insurance company pays out if your car is totaled or stolen, and what you still owe on your loan.

Here’s an example:

• You owe: $17,000

• Car’s value: $14,000

• Insurance payout (in case of total loss): $14,000

• GAP pays: $3,000 difference, so you’re not left paying for a car you no longer have.

Without GAP, you’d still owe that $3,000 out of pocket. When refinancing, it’s often cheaper to add GAP directly to your new loan, rather than buying it at the dealership. At Digital Auto Refi Co, we help customers include GAP protection affordably when needed—especially for those with high LTV loans.

Should You Refinance or Ride It Out?

If you’re underwater and your rate is sky-high, refinancing makes sense as a damage control strategy. You’ll pay less in interest, free up monthly cash flow, and protect yourself with GAP insurance. However, if your LTV is extremely high (e.g., 140%+), or your car is rapidly depreciating, it may be better to ride out a few more months of payments to reduce your balance before applying.

Still, if you're struggling with your current payment or your credit has improved, refinancing now could be the first step to financial recovery—even with some negative equity involved.

Get Help from Digital Auto Refi Co

At Digital Auto Refi Co, we understand that not every borrower starts in a perfect financial position. That’s why we work with a network of lenders who offer options for high LTV loans, flexible terms, and the ability to bundle GAP protection right into your refinance package.

Our average refinance customers save over $130/month with an average rate around 5.49%—and we’ve helped many drivers refinance even while upside down on their loans. The process is digital, fast, and free to get started. No dealership hassles. No pressure.

Start today at www.digitalautorefi.com and see if refinancing your car—even with negative equity—can put you in a better financial position.