What To Know About Cash-out Auto Refinancing

Cash-out auto refinancing is similar to a home mortgage refinance — if you’ve been paying on the loan for several years, you have built up equity that you could convert to cash for home repairs, unexpected medical bills or to pay off debt with a higher interest rate. Car values — like home values — have risen recently, so you may have more equity than you think. Auto loan rates have fallen as well, which could make refinancing at a lower rate a good bet.

Keep in mind that cash-out auto refinancing could be risky. You’re borrowing additional money against your car. If you fail to keep up the payments, the vehicle could be repossessed. If the car is declared a total loss after an accident, your car insurance may not be enough to satisfy the loan, unless you get the right coverage. But it could be a lower-rate alternative to credit card debt or a personal loan.

“I wouldn’t want to say it’s never appropriate for anybody. But it should be something that’s approached with a lot of caution,” says Rebecca Borné, senior policy counsel for the nonprofit Center for Responsible Lending.

How to do a cash-out auto refinance

A cash-out refi looks like a normal auto loan, but you borrow money in addition to the loan balance.

Say your Honda Civic hatchback is worth $15,000, and the loan balance is $9,000. That means you have $6,000 in equity. If you refinance the car for 80% of the vehicle’s value, you could borrow up to $12,000. Pay off the loan with the $9,000 and use the $3,000 for your other expenses. Some lenders will finance more of the car’s value — some will go up to 100%.

Depending on the terms, you could end up with a lower interest rate or a lower monthly payment. Keep in mind, you could be extending the time you pay for the car, which could raise the overall amount of interest you pay. When the paperwork is done, you may have extra cash on hand. Refi loans are available from banks, credit unions and online lenders. You can also refinance your car without getting cash out if you qualify for a lower interest rate or want to lower your monthly payment, but you may end up paying more interest in the long run. If the value of the car is less than the payoff balance on your car loan, you may have to pay the difference up front to refinance.

“The risk of a cash-out refinance is that you can’t continue to make larger monthly payments, should you come into difficult financial circumstances like job interruption,” says Grant Feek, CEO of TRED, an online, peer-to-peer marketplace for cars.

Get started on your cash-out auto refi:

1. Find your car’s current value: Use online pricing tools like NADAGuides, KBB, or Edmunds to find the market value of your car. Ask your lender for the payoff amount for the loan to determine your potential equity. The amount of cash you may get from the refi depends on the equity in your vehicle and your credit score. Some lenders like TruChoice Federal Credit Union will finance up to 125% of the loan-to-value (LTV) ratio on cars, so you can borrow more money than the value of the car’s equity.
2. Research your credit score: Your credit score will influence the interest rates available to you. Check current auto loan rates to see what rates you could qualify for based on your credit score
3. Check lender requirements: For example, Visions Federal Credit Union limits loans to up to 100% of the value on cars that are 10 model years old or newer. Bank Of America will refinance vehicles less than 10 years old with fewer than 125,000 miles with more than $7,500 remaining on the loan.
4. Use the cash proceeds toward paying down other debts. If you have a high-interest credit card balance or want to make a purchase without financing, the cash is yours to do with what you will. Check the fine print on your loan — some lenders have restrictions on how the proceeds can be used, such as not being allowed for educational debts, investments or gambling.

Where to find cash-out auto refinancing?

You can find auto refinancing at many lenders, including banks, credit unions and online sources. Credit unions typically offer attractive interest rates and flexible rates. However, before you decide to refinance your car, compare rates with other types of loans. Some lenders won’t refinance their own vehicle loans, so you may have to find another source.

For example, PenFed Credit Union recently offered refi rates on 2020 or newer cars between 4.24% and 3.99% up to 84, and older cars from 2.39% to 3.39%. Compare that to a home equity line credit of 3.75% to 4.75% variable rate, or a personal loan with rates starting at 5.99%.

Bank of America’s refi rates were as low as 3.39% for 72, compared to a home equity line of credit at 4.62% variable rate and 16.99% to 26.99% for a Visa cash advance.

Bank Of America

Pro: Can refinance existing Bank of America loan

Con: Down payment may be required.

Best for: Those with vehicles less than 10 years old and less than 125,000 miles

PenFed Credit Union

Pro: Large loan amounts up to 100%

Con: Higher rates for older cars

Best for: Credit union members

OneMain Financial

Pro: Doesn’t require excellent credit

Con: Loan origination fees could reduce the amount you receive

Best for: Those with less than excellent credit that can’t borrow elsewhere

Desert Financial Credit Union

Pros: Cash back up to $500 based on loan amount

Cons: Must join the credit union

Best for: Employees of Desert Financial Credit Union, residents of most counties in Arizona or those who are related to a current member.

Is a cash-out refinance right for me?

It’s not a one-size-fits-all solution. While you can lower your interest rate and monthly payment and get some cash on hand, there are some negatives to consider:

• Even if you get a lower interest rate, you may pay for the car longer, which could cost more overall.
• You’re taking on additional debt.
• You will likely be upside down in the car loan, or owe more than it’s worth.
• If you don’t keep up the payments, your car could get repossessed.
• You could be paying on the loan after the warranty runs out.
• If your car is in a total loss accident, you could end up still owing on the car unless you purchase gap insurance or a gap waiver. (Keep in mind if you purchased gap insurance originally, it won’t automatically transfer to the refinance loan)

Before you follow through on a cash-out refi, look at some other sources to get the funds you need.

Alternatives to borrowing against your car

Experts recommend using a cash-out refinance as a last resort because of the risks. If possible, use other forms of financing to pay for unexpected expenses like a traditional loan, a personal loan or asking friends or family to help out.

“On a car, I wouldn’t recommend a cash-out refinance unless you have an emergency need for cash, because, unlike a home, a car depreciates,” Feek says.

• Consider traditional auto refinance: If your credit score has improved or interest rates have dropped, consider an auto refinance with a traditional lender without getting cash out. You could lower the monthly payment and free up the cashflow you need.
• Consider an auto equity loan: Borrow against the equity in your car for a short-term solution. In this case, you’ll still have your auto loan plus the equity loan to manage.
• Consolidate debt: A professional can help you reduce your debt payments to make your monthly commitments easier to manage. Reach out to free resources like the National Foundation for Credit Counseling (NFCC) or Center for Responsible Lending (CRL).
• Ask friends and family: See if friends and family could help you through a cash flow shortage. Perhaps ask for a cash advance from work that you could pay back.
• Unsecured loan: Personal loans are available at rates lower than credit card advances and won’t risk your car.

Cash-Out auto refinancing FAQs

What is cash-out auto refinancing?

Cash out out-refinancing is like a home equity loan. You get a loan for more than the car is worth and use the money to pay down debt or pay emergency bills.

When should I consider refinancing?

You should consider refinancing if:

• Your credit score has improved
• You can find a lower interest rate
• You would like to get cash out

How many times can I refinance a car?

Theoretically, there’s no limit to how many times you can refinance. But each time you’ll be extending the payments, so you could end up paying a lot more in interest, even if the payments are lower. If you refinance, the lender may require that any other title loans or auto equity loans be paid off.