In a NutshellThrough cash-out refinancing, you may be able to get a better interest rate and terms on your auto loan, along with extra cash in your pocket — if you have equity in your car. But a cash-out refinance auto loan could also put you at greater risk of owing more on your loan than your car is worth, or even defaulting on your loan.
A cash-out refinance of your mortgage loan is one way to convert some of your home’s equity into cash. But did you know you can do the same thing with your car loan?
Cash-out refinancing a car loan may allow you to score a lower interest rate or reduce your monthly payments and get a little cash in hand. But there are potential drawbacks and other things to consider, too.
If you’re thinking about a cash-out refinance loan on your auto loan, here are some key things to know.
- How cash-out refinancing on a car loan works
- Potential benefits of cash-out refinancing
- Considerations with cash-out refinancing
How cash-out refinancing on a car loan works
Cash-out refinancing a car loan involves replacing your current auto loan with a new loan, plus an extra amount that you’ll receive in cash once the loan closes. The amount of extra cash you can borrow is based on the amount of equity you have in the car.
In addition to getting some money to make a large purchase, pay off higher-interest debt like credit cards or cover an emergency, you may also qualify for a better interest rate than you have on your original auto loan.
The process of getting a cash-out refinance loan is similar to a traditional car refinance loan. First, you’ll need to estimate how much your car is worth. One way to do this is by using websites like Kelley Blue Book or NADA. Compare your car’s fair market value to what you currently owe to get an idea of how much equity you have in your vehicle.
Contact lenders that offer cash-out refinance loans to find out what terms are available and what information you need to provide to complete the loan application. Some lenders may limit the amount of extra cash you can borrow, while others may allow you to borrow up to 100% of the car’s value if you have enough equity in the vehicle. Keep in mind that not all auto lenders offer cash-out refinancing, even if they offer traditional refinance loans.
If you’ve completed the application process and are approved, you can close your loan and use the lump sum of cash.
Potential benefits of cash-out refinancing
Cash-out refinancing isn’t always the best way to get access to cash fast, but there could be some benefits.
You may get better loan terms
If your credit has improved or interest rates have dropped since you were approved for your original car loan, you may be able to qualify for a lower interest rate. Depending on how much you’re taking out in cash and your total loan amount, a lower rate could reduce the overall cost of the loan.
You may also be able to reduce your monthly payment by extending your loan beyond your current repayment term. But keep in mind that doing this usually means you end up paying more interest over the life of your new loan.Should you get an 84-month auto loan?
You can get access to much-needed cash
And if you have debts that carry higher interest rates than what you’d pay on your new loan, using a cash-out refinance loan to pay down those more-expensive debts could save you money on interest.
Considerations with cash-out refinancing
While cash-out refinancing your car loan could potentially save you money, be sure to consider these possible drawbacks, too.
Your options may be limited
Because not all auto lenders offer cash-out refinancing, your options may be limited to just a few lenders. This could affect your ability to shop around for the best rates.
Also, some lenders have requirements that may affect whether you could qualify for a cash-out refinance loan. These may include a maximum car age or mileage, minimum loan balance or number of years left on the loan. If you don’t meet these requirements, it could limit your lender selection even further.
You could end up upside-down on your loan
You must have at least some equity in your car to qualify for cash-out refinancing, and some lenders will allow you to take out enough cash for your new loan to equal 100% of your car’s value if you have the equity.
But because your car will depreciate over time, increasing your loan-to-value ratio through a cash-out refinancing loan could increase your risk of becoming upside-down on your loan, or owing more than the car is worth.
If you end up with negative equity on your car, it could be difficult to sell or trade in, and you may end up owing money on the car if it gets totaled in an accident and the insurance payout isn’t high enough.
You may increase the risk of repossession
If cash-out refinancing increases your monthly payment or prolongs your repayment term, it could make it more difficult for you to keep up, especially if you’re living paycheck to paycheck. And if you default on your loan, your lender could repossess your car.
Research both the benefits and drawbacks of cash-out refinancing to determine whether it’s right for your situation. If you’re worried about owing more than your car is worth or having it repossessed, explore other ways to get the cash you need, such as a personal loan.
Even if some other loan options are a little more expensive, that extra cost could be worth the peace of mind in knowing that you haven’t increased your risk of becoming upside down with a cash-out refinance.
If you’re planning to move forward with cash-out refinancing, take your time to shop around and consider multiple lenders. The more lenders you can find and compare, the easier it will be to find the best loan terms for you.