What Is A Cash-Out Refinance Car Loan?

What Is A Cash-Out Refinance Car Loan?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated July 26, 2022

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.

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. 

How Does Cash-Out Car Loan Refinancing Work? 

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

Want To Lower Your Car Payments?

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.

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. More specifically, refinancing means you’re taking out a new car loan to pay off your existing loan.

Cash-Out Refinance Car 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 The new loan balance now includes the previous loan balance plus the extra money withdrawn from your car’s equity.

Car Loan Refinance 

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.

Benefits Of A Cash-Out Car Loan Refinance

There are several perks to a cash-out refinance car loan:

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 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. 

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 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. 

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.

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 will be higher. 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 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.

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 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. 

How To Cash-Out Refinance A Car Loan

4 Steps On Cash-Out Refinancing

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.

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, which you can do for free once every 12 months.

3. Compare lenders

Different lenders have different loan requirements and rates. Conduct a quick online search using an online aggregator to compare various lenders and the options they offer.

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.

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.  

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.


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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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