no more than 125% of the trade-in or retail value. The average amount a lender will refinance is 110%. This means that if you're upside down on more than 10% of the value of your car, you're going to have to come up with the difference before the lender gives you the loan.
If you want to figure out how much you'll need to borrow from a lender to refinance, download the free Auto Refinance Worksheet™ and I'll walk you through the calculation process.If you're not in a position to refinance right now, you have another alternative—trade in your current car for another one with a manufacturer's rebate.
The Power of Manufacturer RebatesA lot of new car manufacturers offer huge rebates to move new cars out the door. There's a big incentive for a dealer to sell a new car.You need to locate the highest rebate offer you can find and work toward trading-in your car to eliminate any upside down situation.
Before you go to a new car dealer, go to www.edmunds.com and look up the rebate and interest rate on every new car and truck a manufacturer offers. This way, if the car salesman isn't being fair with you (as far as rebates and interest rates are concerned) you'll know.
Just go to Edmunds.com and click on "New Cars" and then on "Incentives & Rebates" and you'll get all the information you need.
Some Car Manufacturers Offer Rebates Up to $6,000It's not a good situation to be upside down on a high-interest car loan that you need to refinance. However, you can get around it by purchasing a new car with a large rebate. You just use the rebate to offset the amount you owe on your old car.
And if you find a car with a higher rebate (highly recommended), you're in even better shape. If the rebate is high enough, it can eliminate your negative equity and you can use any remaining amount as part—or maybe even all—of your down payment.
So, if you're $6,000 or less upside down, you can still come out smelling like a rose if you play your cards right.
Ask the car salesman this magic question...In addition, don't be afraid to ask the car salesman this important question:
"What car or truck on your lot do you need to sell immediately?"If you're in a negative equity situation (meaning you owe more than the car or truck is worth) you need every advantage you can get your hands on. Ask the auto dealer to sell you the oldest car in their inventory.
Car dealers are willing to take a loss on vehicles they're having a tough time selling because it costs them more to keep these cars on the lot compared to selling them right away at a slight loss. This could mean another $500 to $3,000 discount for you!
You still need a high enough score to qualifyJust like every other major purchase you make on credit, you need to meet a minimum FICO score requirement in order to qualify for a loan from the lender...especially if the lender is a bank or credit union.
For instance, on new cars one manufacturer requires a FICO score of:
680 and above to get a 125% loan
650 to 679 to get a 115% loan
620 to 649 to get a 110% loan
And a FICO score below 620 gets you only a 100% loan
Any loan over 100% will go toward paying off what you owe on the car you're trading in.
Bottom line: the higher your FICO credit scores are—the more options you'll have and better terms you'll receive. That's why we're always preaching to increase your credit scores.
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Stephen Snyder is the founder of the After Bankruptcy Foundation a non-profit organization that provides free bankruptcy recovery information. He has helped thousands of people get a car loan after bankruptcy by showing them how to increase their credit score.
