Can I Refinance My Car Loan and Get Cash Back?
Explore if refinancing your car loan for cash is right for you. Understand the steps and financial considerations to access your vehicle's equity.
A cash-out auto refinance allows you to secure a new car loan for an amount greater than your existing loan balance, with the difference provided to you as cash. This process leverages your vehicle’s equity to obtain funds, similar to a cash-out refinance on a home, for various personal financial needs.
What is a Cash-Out Auto Refinance
A cash-out auto refinance replaces your current car loan with a new, larger loan from a lender. The new loan covers your original balance plus an additional cash amount, converting a portion of your vehicle’s equity into liquid funds. Your vehicle continues to serve as collateral for the entire new loan.
For example, if you owe $10,000 and your car is valued at $20,000, you might secure a new loan for $15,000. In this case, $10,000 pays off your old loan, and you receive $5,000 in cash. The new loan’s terms, including interest rate and repayment period, apply to the entire $15,000 principal.
Preparing for a Cash-Out Refinance
Lenders consider several eligibility requirements for a cash-out auto refinance. A strong credit score (670 or higher) improves approval chances and secures a favorable interest rate. Lenders assess your debt-to-income ratio to ensure manageable payments. Vehicle characteristics are also evaluated, with limits on age (often around 10 years) and mileage (commonly under 120,000 miles).
The loan-to-value (LTV) ratio, comparing the loan amount to the car’s market value, is also considered. Lenders may allow an LTV up to 120% or 130% of the vehicle’s retail value, meaning the new loan can exceed the car’s worth. This ratio helps determine the maximum cash you can receive.
To support your application, gather documents such as proof of income (pay stubs, tax returns), identification (driver’s license), and proof of residence (utility bill). Have your current loan statements ready, detailing the payoff amount. The vehicle’s title or registration and proof of current auto insurance are also necessary.
The Application and Funding Process
After gathering necessary information and documents, identify potential lenders. Many banks, credit unions, and online lenders offer cash-out auto refinance products. Comparing offers from multiple institutions helps find suitable terms. Online comparison tools can streamline this process. Applications typically involve an online form or visiting a lender’s branch.
During the application, provide your financial, personal, and vehicle details. The lender performs a credit check and assesses your vehicle’s value. This assessment uses industry guides like Kelley Blue Book or NADA Guides to determine market value based on make, model, year, mileage, and condition. The underwriting department reviews your application, considering creditworthiness and vehicle valuation, to make an approval decision.
If approved, the lender presents a loan offer detailing the new interest rate, loan term, and total loan amount, including the cash-out portion. Upon acceptance, the new lender typically pays off your existing car loan directly. The cash-out portion, the difference between the new loan amount and the payoff, is sent to you via direct deposit or check. The process, from application to funding, often completes within a few business days to a week.
Key Financial Aspects of a Cash-Out Refinance
The interest rate on a cash-out auto refinance directly influences monthly payments and the total loan cost. Your credit score, loan term, amount borrowed, and current market rates determine the rate. Higher credit scores generally lead to lower interest rates and savings. The new loan includes both the old loan payoff and the cash received, meaning interest accrues on this larger principal.
The loan term, or repayment period, impacts monthly payments and overall interest paid. A longer term typically results in lower monthly payments but more total interest over the loan’s life. Conversely, a shorter term has higher monthly payments but reduces total interest and allows faster debt payoff. The vehicle’s valuation directly influences the maximum cash-out amount.
Other Options for Accessing Funds
Beyond a cash-out auto refinance, other avenues exist for accessing funds. A personal loan is unsecured, meaning no collateral is required. These loans are repaid in fixed monthly installments, with approval depending on credit history and income. Interest rates can vary widely, often higher than secured loans due to the lack of collateral.
Homeowners can consider a home equity loan or a home equity line of credit (HELOC). A home equity loan provides a lump sum, secured by home equity, with a fixed rate. A HELOC functions like a credit card, allowing borrowing up to a limit with a variable rate. Both leverage home value for potentially larger loans and lower rates, but place your home at risk if you default. Credit cards also offer immediate funds but typically have much higher interest rates, especially for cash advances.