Your vehicle is an asset of value that you may be able to use to get access to some extra cash when you need it. Depending on how much your car is worth, you may be able to qualify for cash-out refinancing. That will not only help you tap into your car’s equity to get quick access to cash, but you might also be able to secure a lower rate and better terms at the same time.
Key Points
- Cash-out auto refinancing lets you pull equity from your car loan and use the extra funds to cover large expenses.
- You’ll need significant equity in your car and decent credit to qualify for a cash-out car loan refinance.
- The amount of money you can take out depends on your car’s value, credit score, and your lender.
- Be wary of the potential risks that may come with cash-out car loan refinancing, including going upside down on your loan, taking on more debt, and possibly increasing your monthly payments.
What Is A Cash-Out Car Loan Refinancing?
Cash-out auto refinancing involves applying for a new larger loan. The goal is to pay off the outstanding balance on the original auto loan and leave some extra cash available to be spent as you see fit. If you can secure a lower interest rate on your new loan, you can reduce your monthly payment amount and the overall amount you owe over the life of the loan, all while leaving you with extra cash in hand.
Speak with a Loans Canada representative today and learn how you can refinance your car loan and save. Call us today at 1-877-995-6269 or click here.
Note: Program is currently not offered in Quebec.
How Does Cash-Out Car Loan Refinancing Work?
To illustrate how cash-out refinancing can work on your car loan, let’s use an example, assuming the following:
- Current loan amount $8,000
- Car’s current market value: $13,000
- Equity available: $5,000
- $4,000 in equity required
| Current Loan | Cash-Out Refinance Loan | |
| Loan Balance | $8,000 | $12,000 ($8,000 + $4,000 equity pulled out) |
| Interest Rate | 7% | 6% |
| Loan Term | 24 months | 36 months |
| Monthly Payment | $358 | $365 |
In this example, you would free up $4,000 from your car’s equity. The extra money you get access to through a cash-out refinance can be used for a variety of purposes, including paying for a large expense, renovating your home, or consolidating your debt.
How Much Money Can You Cash Out By Refinancing Your Car?
The amount of money you can access from your car loan depends on a few key factors:
- Your Car’s Value. The value of your vehicle versus the amount you still owe on your current car loan will determine how much equity is available to you to tap into. With a cash-out car loan refinance, your car will likely be inspected to assess its current value, after which the amount you can cash out may be determined.
- Your Credit Scores. High credit scores will increase your odds of getting approved for a loan amount that is a lot higher than what your vehicle is currently worth.
- Your Lender. Different lenders have their own requirements and standards when it comes to the amount that you can borrow against your vehicle through a cash-out car loan refinance. Some may allow you to access up to 100% of its value, while others may have lower thresholds.
Cash-Out Refinance Car Loan Vs. Car Loan Refinancing
A cash-out refinance car loan is similar to a regular auto loan refinance in that the terms of the loan change. But there is a major difference between the two.
| Cash-Out Car Loan Refinancing | Car Loan Refinancing | |
| Loan Purpose | Access cash by refinancing for a higher loan amount | Refinancing to a lower rate to save money or shorten/extend the loan term to better suit your finances |
| Loan Balance | Increases as you take out money from your car’s equity | Remains unchanged |
| Equity | Requires significant equity in your vehicle | Equity typically required, though the amount depends on the lender’s requirements |
| Monthly Payment | Likely to increase due to the increased loan amount | May be lower if you get a lower rate and/or longer term |
| Loan Term | Typically extended to accommodate the increased loan amount | May remain the same or may change based on the new interest rate and loan terms |
Benefits Of A Cash-Out Car Loan Refinance
There are several perks to a cash-out refinance car loan:
Quickly Access A Large Sum Of Cash
A cash-out refinance car loan can give you access to a lot of money in a relatively short amount of time to cover an emergency expense. A cash-out refinance can be a quick and viable option without the need to apply for a personal loan or even a payday loan.
Better Terms
If the terms of your current loan could use some improvement, you may be able to use a cash-out refinance to secure more attractive terms that work better with your situation. For instance, you can extend the loan term so that you can reduce your monthly payments to fit in better with your budget.
Work With A New Lender
You can use a cash-out car loan refinance to switch lenders if your current lender isn’t working out for you anymore.
Reduce Your Interest Rate
If today’s going rate for a car loan is now much lower than the rate that you locked in at, refinancing your car loan can give you the opportunity to take out a new loan at a lower rate. In turn, this can help you save quite a bit of money on interest.
Risks Of A Cash-Out Car Loan Refinance
Along with the benefits of a cash-out refinance car loan, there are a few drawbacks you should be aware of before applying:
Risk Of An “Upside-Down” Loan
In order to qualify for a cash-out refinance car loan, you need a certain amount of equity in your car. Since your car will depreciate over time, you may be increasing your risk of becoming upside-down on your loan, which means you owe more on your loan than what your car is worth.
If you have negative equity in your vehicle, you’ll wind up owing money on the car if it gets totalled and your insurance payout doesn’t cover enough. You may also have a hard time selling your vehicle with negative equity.
Possible Increased Monthly Payment
Taking out a loan that’s higher than the loan amount on your previous car loan in order to access cash means your monthly payments could be higher, depending on the rate you refinance at. This can put an added strain on your finances.
More Debt
Borrowing more than your current car loan balance with a cash-out refinance means assuming more debt. If you’re already finding it difficult to keep up with your car loan payments, a higher debt load could make you more vulnerable to defaulting on your refinanced loan.
May Require A Longer Term
A higher loan amount might require a longer term in order to keep the monthly payments within your financial comfort zone. Not only will this add more interest to the pile, but it also means it will take you longer to pay off your car loan.
How To Cash-Out Refinance A Car Loan
To cash-out refinance your car loan, follow these steps:
Step 1: Determine Your Vehicle’s Value
Again, the amount of cash you can access will depend in large part on what your car is currently valued at. You can find out what your car is worth by having it professionally appraised or by using handy calculators online.
Step 2: Find Out What Your Credit Score Is
As mentioned, your credit score plays a role in how much of a loan you can get approved for, which will directly impact the amount of cash you can access. You can find out what your credit score is by pulling your credit report from one of the major credit bureaus, from your bank, or from an online third-party service, like Loans Canada’s CompareHub.
Step 3: Compare Lenders
Different lenders have different loan requirements and rates. Conduct a quick online search using an online aggregator, like Loans Canada, to compare various lenders and the options they offer.
Step 4: Adjust Loan Terms To Your Budget
Assess your current budget to determine how much more you can afford to spend on a new loan for a higher amount.
Is A Cash-Out Refinance Right For You?
Should you consider applying for a cash-out refinance, or should you look for other alternatives to access cash?
| When A Cash-Out Refinance On Your Car May Be Right For You | When A Cash-Out Refinance On Your Car May Not Be Right For You |
| You have lots of equity in your vehicle | Your car has little to no equity, or it’s near the end of its life |
| You need extra funds for major expenses like home repairs or want to consolidate debt | You want to use the money for non-essential expenses |
| You’re paying a high rate and can qualify for a lower rate today | You already have a low interest rate on your current auto loan |
| You can comfortably afford the new monthly payments | You’re struggling financially and can barely cover your current car loan payments |
| You want to keep your car and don’t mind a longer loan term | You’re taking on more debt than you can handle, which could worsen your financial strain |
Final Thoughts
Refinancing your car loan can give you the opportunity to take advantage of lower interest rates and help you reduce your monthly payments. And if you opt for a cash-out refinance, you can also gain access to your car’s equity and use the extra funds to cover a major expense. Be sure to weigh the pros and cons of a cash-out car loan refinance to find out if it makes financial sense for you.
