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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.
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.
To illustrate how cash-out refinancing can work on your car loan. Suppose you have $8000 left on your car loan and want an extra $2000 in cash. You can take out a cash-out auto refinance loan for $10,000 to pay off your $8,000 car loan and borrow an additional $2,000 from your vehicle’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.
A cash-out refinance car loan is similar to a regular auto loan refinance in that the terms of the loan change. More specifically, refinancing means you’re taking out a new car loan to pay off your existing loan.
The difference between the two is that a cash-out refinance car loan involves taking out an amount that’s higher than your outstanding balance to leave room for surplus cash. The new loan balance now includes the previous loan balance plus the extra money withdrawn from your car’s equity.
With a traditional car loan refinance, you would take out a new loan with new terms to pay off your existing loan. You’re essentially replacing your old car loan in order to take advantage of a lower interest rate or better loan terms. This may make your loan more affordable, both in terms of monthly car loan payments and overall interest paid.
Refinancing also allows you to lengthen or shorten your loan term to suit your financial needs. For instance, if you shorten your term, you can pay off your loan faster and save on interest. By contrast, you can lengthen your term in order to reduce your monthly payments.
There are several perks to a cash-out refinance car loan:
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 or urgent 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.
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.
You can use a cash-out car loan refinance to switch lenders if your current lender isn’t working out for you anymore.
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 trade in your old car loan for a new one at a lower rate. In turn, this can help you save quite a bit of money on interest.
Along with the benefits of a cash-out refinance car loan, there are a few drawbacks you should be aware of before applying:
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.
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 will be higher. This can put an added strain on your finances.
Borrowing more than your current car loan balance with a cash-out refinance means you’re taking on 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.
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.
The amount of money you can access from your car loan depends on a few key factors:
Cash-Out Refinance Car Loan FAQs
When should you cash-out refinance a car loan?
Expenses that are more pressing and important may warrant a cash-out refinance car loan, such as paying for a medical procedure or covering the cost of a home renovation project in order to make your home safer or more liveable. But frivolous expenditures, such as a vacation or buying fancy furniture, may not be worth the added financial stress that a larger loan may entail. Where can you do a cash-out auto refinance?
Cash-out car loan refinances are available through banks, credit unions, and online lenders. How much does it cost to refinance?
The cost of refinancing your car loan will depend on your exact financial circumstances and your lender. That said, the more common costs come in the form of interest added if you extend your loan term. How soon can you refinance?
There is no rule written in stone about how soon you can refinance after you first take a car loan. Having said that, you might have to wait until the original lender is named as the lienholder on title. Further, you may also want to wait a few months after taking out your original loan just to avoid taking too much of a hit on your credit score.
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.
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Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.
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