Car loans are different from many other types of loans because the collateral (the car) loses value so quickly in the early part of the term of the loan, even while the balance of the loan is barely decreasing at all. It is not unusual, especially on a new car loan, to be upside-down for more than a year or two. A large down payment helps avoid this, but lures of easy credit and “nobody will get turned down” leave many car owners holding a loan on a car that is worth much less than they owe.
For most drivers, this is not a problem. If the terms of the loan are something you can live with, it will only be a year or two before you are back where the resale value of the car is more than the amount left on the loan. But for many owners, being in that upside-down position is not acceptable. One frequent problem is the owner who was talked into a terrible loan deal, either with high rates or a remarkably long repayment term for the car. Those people need to get out of the original loan and into a better loan. The second group of potential refinancers are car owners who have had a change of situation since they took out the loan, such as a layoff or unexpected bills that impact their ability to pay. Finally, some owners are just worried about being upside down in any loan: if the car is totaled the insurance company will only pay the cash value, leaving the owner to come up with the rest for the bank out of pocket.
There are three ways to go about refinancing an upside-down loan. You can attempt to change the terms without getting out from being upside-down, you can bring cash to the table and cover the difference between the value and the loan, or you can try to cross-collateralize the loan.
The most likely way to get out from the situation is to refinance with an injection of cash. This is the route that the lender is most likely to be willing to accept. By bringing enough cash to the table to get yourself right side up again, the lender does not need to worry about holding a loan that is worth more than the car. As long as nobody takes an additional security interest in the car, the lender will not likely care where the cash came from, assuming that there is no indication the money is obtained illegally. If you can borrow the necessary cash from friends or family, you can get to work negotiating new terms for the new loan.
In some cases, the lender might be willing to consider refinancing without a cash injection. If your circumstances have changed from losing a job, getting divorced, or having unexpected bills that will prevent you from paying, the lender might be prepared to adjust your terms to make the payment affordable. They will likely not do this purely out of generosity: they will probably make more money off you over the long term, or are doing it purely to avoid having to repossess a car that they will not be able to sell for what you owe.
A third option, and one that is more difficult to arrange, would be to arrange for additional collateral to help make the refinance possible. This is a very risky plan, and you should not do it unless you absolutely have to. Even then, there is no guarantee that your lender will agree to it, because most legitimate lenders are reluctant to get into this kind of deal. The way this would work is that you agree to give the lender a new security interest in some additional piece of property in exchange for them refinancing the upside down loan. It might be title to a vacant piece of land, or perhaps another car that you which is paid off. Whatever it is, if you fail to make the new payments on the refinanced loan you will lose both the car and whatever else you have pledged. Use this only in very limited circumstances, and only with full appreciation for the risks that it entails.
Refinancing and upside-down car loan in not for everybody. If you are able to make the payments you will be right side up in a matter of months or years. But if you have to get out of the terms and owe more than the car is worth, you will likely need to bring something to the table to get that new loan, either cash, title to something else, or a very good explanation for why the lender should take your refinance offer.