Unlike houses, cars generally lose value over time. However, if you have equity in your vehicle, you may be able to tap into that value with a cash-out auto refinance loan.
Getting a cash car refinance is a relatively simple process, but there are some potential risks. Understanding how they work can help you determine if getting one is right for you.
What is a Cash-Out Refinance auto loan?
Similar to a cash mortgage refinance, an automatic cash refinance allows car owners to access some of the equity they have in their vehicles. For example, if you owe $20,000 on your car loan and the car is worth $30,000, you have $10,000 in equity.
If you refinance your loan with a new $30,000 loan, you will receive the $10,000 difference in cash, by direct deposit to your bank account, or by check.
A major difference between cash loans for cars and homes, however, is the maximum amount you can borrow.
With a mortgage refinance with drawdown, many lenders only allow you to borrow up to 80% of the value of your home, although some can go higher. With an automatic refinance, however, you may be able to achieve 130% of the vehicle’s value. This percentage is called the loan-to-value ratio.
Additionally, automatic cash refinances typically do not incur upfront fees. In contrast, a mortgage refinance with withdrawal may require closing costs up to 6% of the loan amount.
Finally, while a cash-out home refinance may take a month or two, a cash-out car refinance may only take a week or two.
How Does an Automatic Cash-Out Refinance Work?
To get auto-cash refinance, you’ll start by contacting lenders directly to submit applications. Some may even allow you to Get pre-approved before applying. You can also contact your current lender to see if you can achieve your goal without changing financial institutions.
Before submitting an application, check each lender’s website to get an idea of the requirements and how much you can borrow.
Note that many lenders may not specify on their website or even in their applications that they offer a withdrawal option. In this case, you may need to speak to a loan officer to determine if you can do this.
After you submit your application, lenders typically use an appraisal guide like the National Automobile Dealers Association book to determine the value of your vehicle. They will also take into account the age and mileage of the car – some lenders may refuse your application if the car is too old or has too many miles. Finally, they will perform a credit check to determine your eligibility and interest rate.
Once you complete the underwriting process, the lender will let you know your rate offer, as well as how much you can borrow based on your application details, your car’s value, and its loan-to-value limit. You can borrow up to the amount offered by the lender or less. Read and sign the loan agreement, and you should receive your funds within a few business days.
Advantages and disadvantages of an automatic Cash-Out refinance
An automatic cash refinance may be a good option for some vehicle owners, but there are some risks to consider before applying.
- It can provide inexpensive financing. If you need money for debt consolidation, home improvements or for other purposes, you may be able to get a much lower interest rate with a cash car refinance compared to a personal loan. You also won’t have to deal with the high closing costs of a mortgage refinance or home equity loan.
- You might get a better rate. If your credit rating has improved since you took out your existing car loan or interest rates have generally dropped, you may be able to get a lower interest rate than what you are currently paying.
- You could reduce your monthly payment. Depending on the terms of your existing and new car loan, you could potentially get a lower monthly payment. This can be especially true if your cash loan balance is lower than your original car loan balance.
- You may end up underwater on your loan. If you borrow more than your car is worth, you will immediately negative equity in the vehicle. If the car is sold out or you try to sell it, you will have to pay the balance out of your own pocket. Even if you don’t exceed the value of your car with your loan, the vehicle could depreciate faster than you pay it back, which can still cause you to be underwater.
- You might end up paying more. If you can’t get a lower interest rate, the new loan could become expensive, both in terms of higher monthly payments and the extra interest you’ll have to pay. Even though you can get a lower interest rate and monthly payment, you’ll usually extend your repayment term with refinancing. This means you could end up paying more total interest. “Don’t use your car as an ATM at a higher rate for a long time,” says Steven Gordon, senior director of finance at Way.com, an auto services app.
- You could risk a repossession. Depending on the terms of your current and new car loan, you could end up with a higher monthly payment. If you cannot afford this payment, you could end up in default and risk having the vehicle seized.
When to Consider an Automatic Cash-Out Refinance
Refinancing your auto loan to take money out of equity may be a good option for some, but not all. Here are some situations where this might make sense:
- You don’t plan to borrow more than your car is worth.
- Your credit score is in excellent shape and you can get a comparable or even lower interest rate.
- You can comfortably afford the new monthly payment.
- You need money for a good purpose and you want to minimize your interest costs.
- You don’t own a home or want to avoid the high closing costs of a mortgage refinance or home equity loan.
“A refinance loan can be a good idea when you know you have good control of your finances and can handle the additional debt,” says Lyle Solomon, senior attorney at Oak View Law Group, a debt relief firm. debts. “It is essential to check your spending habits before considering taking out a refinance loan with withdrawal.”
If you opt for a cash-out refinance, try to avoid extending your repayment term too much. “Extending the refinance loan for 84 months just to get a lower payment when you have less than two years left on your current loan, unless that’s the only way you can afford to keep the car, don’t is not a smart move,” Gordon said.
Cash-Out Auto Loan Alternatives
If you’re considering using a car refinance to access some of your capital, it’s important to consider all of your options before proceeding. Depending on your need for money, here are some potential options:
- Cash mortgage refinance. If you need to borrow more than a cash car refinance allows, you might consider doing it with your home instead. This can be especially helpful if mortgage rates are low and you have significant equity in your property.
- Home equity loan or line of credit. Obtain a home equity loan or home equity line of credit may be worth considering if you need more money but don’t want to refinance your main mortgage. In particular, a HELOC can be beneficial if you want continued access to credit instead of a one-time loan.
- Personal loan. If you want to avoid the risk of losing your car, consider a unsecured personal loan. Interest rates can be higher, but if you have great credit you can still get a single digit interest rate.
- Credit card 0% APR. If you have good credit, you may be able to get a credit card approved with a 0% annual launch rate on purchases, balance transfers or both. Just make sure you can pay off your balance before the end of the promotional period to avoid a high interest rate. Also, remember that you won’t know what your credit limit will be until you’ve been approved. Your card limit may not be high enough to cover the purchase you had in mind.
Take the time to consider all of your options and choose the one that best suits your needs and can help you save the most in the long run.