How Does Cash-Out Auto Loan Refinancing Work?

Cash-out auto refinancing is when you replace your existing auto loan with a new one for a higher amount, allowing you to tap into your vehicle's equity to free up cash.

Cash-out refinancing offers borrowers flexibility, but it’s also important to weigh the potential downsides — such as increased debt, extra fees and the risk of negative equity.

This article walks you through everything you need to consider before starting the cash-out refinancing process.

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Do you get money back when you refinance a car?

In the standard auto refinancing process, you don’t receive cash back, as you're simply replacing your existing loan with a new one.

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What is a cash-out car loan?

An auto refinance with cash-out allows you to borrow more than your remaining loan balance and access the difference as a lump sum.

Cash-out refinancing is commonly used by those needing extra funds for debt consolidation or unexpected expenses. This makes it an appealing alternative for car loan borrowers seeking financial relief.

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How much could you get with a cash-out refinance?

The amount of a cash-out refinance largely depends on your vehicle’s equity — which is calculated as your car’s current market value minus the remaining loan balance. Generally, higher equity means a greater potential cash-out amount.

Key factors influencing your cash-out amount include:

• Loan-to-Value (LTV) Ratio: Most lenders cap cash-out amounts at around 80% of the car’s value.‍
• Credit Score: A higher credit score boosts your chances of securing better rates and larger loan amounts.
  

Lenders will also evaluate your income, financial stability and the vehicle’s age and condition.

Each lender has specific terms and restrictions for cash-out refinances, so you’ll want to compare offers as you proceed.

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Is a cash-out refinance worth it?

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Cash-out refinancing can be worthwhile if it offers you a lower interest rate or better loan terms. However, cashing out a car loan may not be worthwhile if it extends your loan term or raises your monthly payments beyond your budget. Ultimately, the right answer will be specific to you — and depends on your financial situation, goals and your car's value. Consider the following pros and cons of cash-out refinancing before you decide.

Pros

• Access to cash: A key advantage of cash-out refinancing is receiving an immediate lump sum payment.
• Financial flexibility: The funds you receive for cashing out your car loan can be used for purposes including home repairs, debt consolidation or covering unexpected expenses.
• Improved loan terms: If interest rates have dropped since your original loan, refinancing could help you secure a lower rate, reducing your monthly payments.
• Debt consolidation: Using cash from your refinance to pay off high-interest debts can save money on interest and simplify your finances.
• Tax benefits: In some cases, the interest on a cash-out refinance may be tax-deductible, offering additional savings.

Cons‍

• Increased debt: Borrowing more than you owe on your car essentially increases your overall debt. This has the potential to result in higher monthly payments.
• Risk of negative equity: If you borrow more than your current loan balance, you might end up owing more than your car is worth, leading to negative equity. This situation can complicate selling or trading in your car without incurring a loss.
  
• Longer loan terms: A cash-out refinance may extend your loan term, meaning you could be paying off your car loan for a longer period. This can increase the total interest you pay over the life of the loan.
  
• Higher monthly payments: If you increase your loan amount, your monthly payments could also rise, which could put a strain on your budget, especially if your financial situation worsens.
  
• Fewer lender options: Not all lenders offer cash-out refinancing for car loans. This lack of competition could lead to higher interest rates or less favorable loan terms.

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How cash-out refinancing works: Step by step

‍The cash-out refinancing process will look similar to a standard car loan refinancing. Here’s how it works:

1. Collect documentation

‍Lenders will typically require the following documentation for a refinancing application:

• Proof of income: Pay stubs, tax returns or bank statements to verify your ability to repay the loan.
• Current loan information: Details about your existing loan, including balance and monthly payments.
• Vehicle details: Information such as the car’s title, registration, and details like make, model and mileage.

You may also need to provide a government-issued ID, a valid auto insurance policy and authorization for the lender to perform a credit check.

2. Compare lenders

‍A thorough comparison of lenders can help you secure favorable terms, maximize your cash-out amount and avoid unnecessary costs. Most lenders provide online applications, making it easy to compare their rates and terms. Focus on lenders that specialize in cash-out auto refinancing, as they may offer tailored products and better conditions.
You should also pay attention to the annual percentage rate (APR), loan term options, repayment periods and any additional fees, such as application or origination fees.

‍3. Apply for your loan

‍Having gathered your necessary paperwork, it’s time to apply for your cash-out refinance.

After submitting your application, the lender will assess your financial profile and vehicle details for eligibility. Once approved, review your loan terms thoroughly before signing to ensure you understand all conditions, fees and repayment requirements.

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‍FAQs

‍Here are answers to some common questions about cash-out refinancing a car loan.

How does cash-out auto refinancing work?

‍Cash-out auto refinancing replaces your current loan with a new loan for a higher amount. You can then receive the difference as a cash lump sum.

Do you actually get cash from a cash-out refinance?

‍Yes, a cash-out refinance can provide you with cash by borrowing against your vehicle's equity. You receive the difference between your new loan total and the amount owed on your existing loan. The amount you receive will depend on your car's value and your lender's policies.

Does your payment go up with a cash-out refinance?

‍Usually, yes. If you borrow more money, you can expect your monthly payments to increase. Loan terms and interest rates also play a role, so carefully evaluate these factors before proceeding.

‍What are the disadvantages of a cash-out refinance?

‍The main disadvantages include potentially higher monthly payments and the risk of losing your vehicle if you cannot make payments. Cash-out refinancing may also increase your total debt.