Getting a cash-out auto refinance can be a way to borrow money by using the equity you have in your vehicle. Potentially, you could also get a lower interest rate on your auto loan, as well.
In a cash-out auto refinance, you are refinancing your current auto loan, but also getting a cash loan as part of the deal. Once the deal is sealed and you’ve gotten the cash-out part of the loan, you’ll typically start making regular payments to pay back the refinanced car loan with interest.
Like any type of financing, cash-out auto refinancing does come with its own particular pros and cons. Yes, you may spend less on interest for your cash-out loan than you would for a credit card cash advance, but you are putting your vehicle at risk since it will be used to secure the loan.
Key Points
• Cash-out auto loan refinancing allows you to refinance your car loan for more than you owe, pocketing the difference in cash.
• To qualify, you need equity in your car, a good credit score, and a stable income to ensure you can handle the new loan amount.
• The extra cash can be used for various purposes, such as paying off other debts, covering emergencies, or making home improvements.
• While cash-out refinancing can provide immediate funds, it may come with higher interest rates or longer loan terms, increasing the total cost.
• Be cautious, as taking out more than you owe can increase your debt and put your car at risk if you default on the loan.
What Is a Cash-Out Refinance?
A cash-out refinance is when a borrower taps into an asset’s available equity by paying off an existing loan with a larger collateralized loan. The cash-out refinance provides borrowers with extra funding by pledging the asset as collateral and borrowing against its value.
A borrower, for example, could pay off a mortgage or auto loan with cash-out refinancing that gives the borrower cash funds and a larger loan balance. Cash-out refinancing can allow these homeowners or car owners to trade equity for cash, and borrowers may have few or no restrictions on how to use the cash-out refinance funds.
Replacing the account balance of an existing loan with a larger-sized loan increases your burden of debt. The risk of taking out a cash-out refinance is lenders may seize your collateral if you fail to make required repayments.
Can You Cash-Out Refinance a Car?
Yes, you can cash-out refinance a car, given the right circumstances. What are those?
For one, you must own a car and have a fair amount of equity in it. Also, your lender (either your current auto loan lender or a new one) must be willing to offer a cash-out refinance. These two elements are interrelated. To expand on them, a cash-out auto refinance is a type of loan that’s secured by your vehicle. The vehicle acts as collateral, so typically you must own a good percentage of it so that the cash-out loan is not too risky for your lender.
However, just because a lender offers standard refinancing doesn’t necessarily mean that it offers cash-out refinance auto loans. Only some do.
Lenders that do offer cash-out refinance auto loan funding may vary on how much cash you can borrow against your vehicle equity. Some may allow you to borrow up to 100% of the value of your car, while others may set a lower limit.
How Does a Cash-Out Refinance Work?
Cash-out auto loans typically start with an application just like you’d find with any other type of loan. Generally, the lender performs a credit check to help it determine what interest rate to offer you. Your income and other debts are also evaluated to make sure you can afford the new loan payment. Lenders generally prefer borrowers with a debt-to-income ratio of 36% or lower.
With an auto refinance cash-out loan, however, the lender also looks at the value of your car. You may need to take your vehicle to be physically inspected in order to determine how much money you could potentially borrow. Your equity in the car is equal to the car’s value minus the balance of your auto loan.
Car refinance lenders may be willing to refinance your loan and provide you with additional cash-out funds if your equity in your car is sufficient to cover the transaction.
Once you’re approved for a cash-out refinance, you receive the cash-out funds from your lender. It could be in a check or through direct deposit. Then you will start repaying the loan based on your loan agreement.
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Which Kinds of Lenders Offer Cash-Out Refinancing?
The following financial institutions and entities may offer cash-out refinancing:
1. Banks
Commercial banks may offer cash-out refinancing. This includes cash-out refinancing on a home loan or car loan.
2. Credit Unions
Credit unions may offer cash-out auto refinancing. Some may allow you to borrow up to 100% of the value of your car. Say you owe $20,000 on a car valued at $25,000, you could refinance up to $25K and receive $5K in cash-out funds. You may even have the option of refinancing with the same lender.
3. Private Lenders
Nonbank private lenders may also offer cash-out refinancing. This includes financial technology companies and car title loan agencies.
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Does a Cash-Out Refinance Affect Your Interest Rate?
You will most likely see completely new loan terms when you apply for auto loan refinancing with a cash-out component.
There are many factors that can impact your new car loan interest rate — and loan amount is one of them. If you’ve built your credit score since you took out your original auto loan, your rate could be lower. However, there’s no single factor that defines your rate, even with a cash-out refinance.
When Can You Cash-Out Refinance a Car?
You might be able to get a cash-out refinance if you’re in the right situation. A cash-out refinance lets you tap into your auto equity and get a lump sum of cash in return for a larger loan balance. This could make sense for you if you’ve built your credit score since you took out your original loan and you can comfortably afford the new monthly payments.
You also typically need to have a relatively newer vehicle in order to qualify, usually under 10 years old. Lenders typically look at the car’s current value and mileage as part of the loan application.
How Often Can You Cash-Out Refinance?
Technically, there’s no limit to how often you can refinance an auto loan. The main consideration is how much equity you have in the asset. It’s unlikely that you’ll be able to accrue enough equity to get a cash-out refinance on your vehicle very frequently.
How Soon Can I Cash-Out Refinance?
There’s no time limit on when you can do a cash-out auto refinance. The most important factor is how much equity you have in your car. As soon as you’ve made enough payments to earn some equity, you could apply to refinance.
Alternatively, maybe you made a sizable down payment (giving you automatic equity) but your financial situation has changed since taking out the loan. Look at your loan balance compared with the vehicle’s current market value to find out whether enough time has passed for a cash-out refinance.
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Does a Cash-Out Refinance Affect Your Credit Score?
Yes, potentially your credit score could be impacted in a few ways by a cash-out refinance. First, you’ll likely see a small dip because of the hard inquiry performed on your credit report as part of the application process. You may also see a dip in your score from a new account being added to your credit report, which can reduce your average age of credit.
What Credit Score Is Needed for a Cash-Out Refinance?
Different lenders require different credit scores, but cash-out refinance loans are typically reserved for borrowers with better credit. That’s because you’re asking for a higher loan amount, so the lender wants to feel confident that you’ll repay the new balance in full.
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Pros and Cons of a Cash-Out Refinance
There are a number of cash-out auto refinancing pros and cons. We highlight some of them below:
Pros of Cash-Out Refinancing
Consider the following cash-out refinancing pros:
• You can potentially borrow money at a lower cost than a high-interest personal loan or credit card
• You may be able to secure a lower interest rate than your existing loan rate
• You can take advantage of your available equity in a valuable asset
Cons of Cash-Out Refinancing
Consider the following cash-out refinancing cons:
• You could pay more interest over the life of the loan if you refinance with an extended term
• You’ll use your asset as collateral for the cash-out funds, which puts you at risk of losing your asset if you fail to repay the new loan
• It may replace your existing debt burden with a larger burden of debt
You can weigh the pros and cons when deciding whether cash-out refinancing is right for you. Trading equity for cash can provide you with general purpose funding, but the transaction is not risk-free.
One of the risks of cash-out auto refinancing is you can potentially end up underwater on your refi auto loan, meaning your balance could be higher than the value of your car, especially if your vehicle depreciates quickly. If your car gets totaled, you’ll still owe the remaining loan balance on the cash-out refinance. And if you can’t afford the new larger loan payment, your car could be repossessed.
Is a Cash-Out Refinance Taxable?
No, you don’t have to report the money from a cash-out refinance as taxable income because it’s actually a loan. You have to repay the balance, along with interest. So even though it feels like you’re getting a lump sum payment, you’re still paying to borrow the money.
Are There Closing Costs on a Cash-Out Refinance?
There aren’t substantial costs with most auto loan refinances, even when cashing out equity. You may have to pay a title transfer fee, which varies by state. Some lenders may charge an origination or car refinance transaction fee. Check your refinancing offer for a breakdown of additional costs.
4 Alternatives to Cash-Out Refinancing
Here are some alternatives to cash-out refinancing:
1. Normal Auto Refinancing
Consumers with an auto loan could always consider normal refinancing, which may provide borrowers with a lower monthly payment without trading equity for cash. Among the pros and cons of auto loan refinancing is it may provide you with a lower interest rate (pro) while temporarily causing your credit score to drop from a hard pull inquiry (con). Refinancing for a lower monthly payment in some cases may extend your term, and extending your loan term can saddle you with more interest charges over the life of your loan.
A car loan refinancing calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs. Auto loan refinancing costs may include a number of fees, such as early termination fees for paying off your current lender early with a refinanced loan.
2. Consolidate Your Debt
Consumers with existing loans and revolving credit accounts can apply for a debt consolidation loan. This could simplify your debt burden and may allow you to save on interest costs.
3. Auto Equity Loans
Car owners who have no outstanding auto loan debt and 100% equity in their cars can apply for auto equity loans. An auto equity loan is a secured lending product that allows you to borrow against the available equity in your car.
Borrowers may use auto equity loans for almost any purpose, including vacations and unplanned expenses. Lenders may seize your vehicle if you default and fail to make required repayments on your auto equity loan.
4. Unsecured Loans
Consumers can apply for unsecured personal loans without pledging any assets as collateral. Borrowers may need good credit to qualify for unsecured loans. An unsecured consumer loan can provide you with a lump sum of borrowed money or a line of credit. Failure to repay an unsecured loan can damage your credit and cause lenders to sue you for breach of contract.
Auto Loan Refinancing Rates
An auto refinance cash-out loan can be less expensive than other loan options, but you’ll need both equity in your vehicle and the confidence that you can comfortably afford your new payments in order to make it work.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Can you refinance your car and get cash out?
Yes, you may have the option of refinancing your car loan with a bigger loan that gives you cash out. A cash-out refinance lets you tap into your auto equity and get a lump sum of cash in return for a larger loan balance.
How does cash-out refinancing work?
Cash-out refinancing pays off your original loan with new financing and gives you a larger loan balance and cash funds from your equity. Once you’re approved for a cash-out refinance, you receive the cash-out funds from your lender and start repaying the loan based on your loan agreement.
What are the pros and cons of a cash-out refinance?
The primary benefit of cash-out refinancing is that you can potentially borrow money at a lower cost than taking out an unsecured loan. Pledging your car or home as collateral on a loan reduces risk to the lender and can help you get approved on more favorable terms.
One of the cons of cash-out refinancing is that you could pay more total interest over the life of the loan if you refinance with an extended term. Additionally, you’ll pledge an asset as collateral for the cash-out funds, which does put you at risk of losing your collateral if you can’t repay the higher loan amount.
How often can you get a cash-out refinance?
Technically, there’s no limit to how often you can refinance an auto loan. The main consideration is how much equity you have in the car. It’s unlikely that you’ll be able to accrue enough equity to get a cash-out refinance on your vehicle very frequently.
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