Cash-out Auto Refinancing: What You Need To Know (2022) - MarketWatch

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With cash-out auto refinancing, you can pay off your existing auto loan and take out some of your vehicle’s equity as cash. You’ll owe more debt overall, but it can be a good decision if you can get a much better interest rate and keep the loan term relatively short.

We at the Home Media reviews team have compared the best auto refinance rates, and we recommend considering cash-out refinancing along with traditional refinancing options. We’ll cover the pros and cons of cash-out auto refinancing here.

What Is Cash-out Auto Refinancing?

Cash-out auto refinancing allows you to take cash out of your vehicle’s equity and use it for whatever you want. It’s a type of refinance auto loan, which means you take out a new loan to pay off your old one. What’s unique about cash-out refinancing is that the new loan is larger than what you owe on your vehicle, and you get the difference in cash.

Traditional vs. Cash-out Auto Refinancing

With traditional refinancing, you only have to pay back whatever you have left on your current auto loan, ideally at a lower interest rate. The main advantages of auto refinancing are saving money on interest and having a lower monthly payment.

Cash-out auto refinancing makes it much harder to both save money and have a lower payment. This is because you’re adding to the debt owed. You’ll need to secure a much better interest rate or make higher monthly payments to save on interest compared to your existing auto loan.

Pros and Cons of Cash-out Auto Refinancing

Cash-out auto refinancing may or may not be a good idea depending on your financial situation. Here are the basic advantages and disadvantages of a cash-out refi:

How Much Cash Can You Get?

With cash-out auto refinancing, you can usually take out an amount up to your vehicle’s equity. You can find the equity you have in your vehicle by subtracting the remaining debt from the value of the vehicle. Some lenders will finance up to 80% of the value of your vehicle, and others will finance up to 100%. Some will even let you borrow more than 100%.

Cash-out Auto Refi Example

Let’s say your car is worth $20,000 and you have $12,000 left on your loan. This means you have $8,000 of equity in your vehicle. If you took out the full $8,000 in cash, you’d owe $20,000 on the new cash-out auto refinance loan. If the lender would only finance up to 80% of your car’s value, you’d get a maximum of $4,000 in cash instead.

Even though most financial institutions won’t allow you to get a loan that’s larger than your car’s value, you can still risk being upside down if you extend your repayment term too long. Your loan would automatically be upside down if you took out more than your car’s value (we recommend avoiding this).

Check Your Car’s Value

Use tools like Kelley Blue Book or the National Automobile Dealers Association to check the value of your car. You can enter your car’s vehicle identification number (VIN) to see a close estimate based on mileage and condition. This will give you an idea of what kind of loan approval you can expect for your car’s value.

Lenders will check the value of your car with industry books or request an in-person inspection of your vehicle.

Is Cash-out Auto Refinancing a Good Idea?

Cash-out auto refinancing is only a good idea if you can get a better rate and keep the loan term relatively short. This will probably mean your monthly payments will stay roughly the same or increase. You are adding more debt, after all. That’s why cash-out refinancing isn’t a smart way to simply get extra spending money.

Secure a Better Interest Rate

If you can’t get a better annual percentage rate (APR) on a cash-out auto refinance loan, we don’t recommend getting a new loan. Adding more to your debt at the same rate will require you to pay more interest, and refinancing isn’t a long-term solution to cash flow problems.

Keep the Loan Term Short

With cash-out auto refinancing, it’s hard to pay less interest overall and get smaller monthly loan payments. You can get a lower monthly payment by extending the loan term, but you’ll pay more for the vehicle in the end.

To save the most money over the life of the loan, consider increasing your payment amount to pay the debt off as soon as possible. However, be sure you can afford the monthly payments. If you default on this type of loan, you risk losing your car.

Can You Consolidate Debt With a Cash-out Auto Refi?

It’s possible to use a cash-out refinance loan to consolidate debt. This only works if you can get a loan with a better interest rate than what your other debts have. For instance, if you have a credit card with a $3,000 balance and a 15% interest rate, it could be a good idea to pay it off with a cash-out refinance loan at a rate of 7%.

The risk is owing more than your car is worth. With a personal loan or debt consolidation loan, defaulting is the only event that would trigger a full repayment. But when your car is collateral, a total loss requires the insurance company to pay for the value of the car and you to cover the remainder.

Alternatives to Cash-out Auto Refinancing

If you decide cash-out auto refinancing isn’t right for you, there are other options for paying your car loan off.

Traditional Refinance Loans

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If interest rates are better now than when you bought your car, a traditional auto refinance loan might be the way to go. It could lower your payments, which would provide extra cash flow each month. Traditional auto refinancing could also reduce the total amount of interest you pay.

Personal Loans

Personal loans tend to have higher interest rates than auto loans because they aren’t secured by collateral. But borrowing $2,000 and paying it back in the short term could be better than adding $2,000 to auto loan debt that’s secured by a depreciating vehicle.

The Bottom Line

Consider cash-out refinancing carefully, as you could end up owing more than your car is worth. We only recommend getting a cash-out auto refinance loan if you can:

Get a significantly better interest rate
Avoid extending the loan term
Make larger payments to save on interest charges

Always check your current loan’s disclosures to see if there’s a prepayment penalty. If so, you’d be charged a fee for paying your existing loan off early.

Our Recommendations for Refinance Auto Loans

Deciding when to refinance a car — whether with a traditional refinance loan or a cash-out refinance loan — largely depends on the interest rates available to you at a given time. Compare reputable companies like Auto Approve and myAutoloan to find the best auto loan rates.

Auto Approve: Top Choice for Refinancing

Auto Approve specializes in refinancing auto loans for cars, trucks, SUVs, RVs, boats and ATVs. Its refinance rates start at 2.25% for borrowers with the best credit scores. The company has an A+ rating and accreditation from the Better Business Bureau, along with an average rating of 4.4 out 5.0 stars from customer ratings on the organization’s website.

Learn more in our Auto Approve review.

MyAutoloan: Best Low-Rate Option

The financing marketplace myAutoloan connects borrowers to a network of lenders that includes credit unions, banks and dealerships. With a single prequalification application, you can see up to four loan offers. The company offers auto refinancing rates as low as 1.99% to borrowers with good credit history.

Learn more in our myAutoloan review.

Our Methodology

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best auto loan companies. We collected data on dozens of loan providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the companies that scored the most points topping the list.

Here are the factors our ratings take into account:

Reputation (30% of total score): Our research team considered ratings from industry experts and each lender’s years in business when giving this score.
Availability (20% of total score): Companies that cover a variety of circumstances are more likely to meet borrowers’ needs.
Loan Details (15% of total score): We considered the types of loans, term lengths and loan amounts that are available from each lender to determine this score.
Rates (25% of total score): Auto loan providers with low APRs scored highest in this category. Available discounts were also taken into account.
Customer Experience (10% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.

*Data accurate at time of publication.

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