Can You Cash Out Refinance a Car?

A cash-out auto refinance provides a way to access the equity built in a vehicle by replacing an existing car loan with a new, larger one. This allows borrowers to receive the difference as a lump sum of cash. The primary purpose is to tap into a vehicle’s value for various financial needs.

Understanding Cash-Out Auto Refinancing

Cash-out auto refinancing involves obtaining a new loan greater than your current auto loan’s outstanding balance. The new, larger loan pays off your original car loan, and the remaining funds are disbursed directly to you. This cash-out amount is derived from your vehicle’s equity, the difference between its market value and your current loan balance. Lenders assess the vehicle’s value to determine how much cash can be accessed, with some allowing refinancing for up to 130% of the car’s worth.

Eligibility and Information Needed

Securing a cash-out auto refinance depends on meeting specific borrower and vehicle criteria. Borrowers need a good to excellent credit score, often above 670, though some lenders consider scores as low as 580. Lenders also evaluate income stability and your debt-to-income (DTI) ratio, generally preferring it below 36%, though some accept up to 49%. A consistent history of on-time payments on your current auto loan and other debts is also important.

Vehicle eligibility is a significant factor. Most lenders require the vehicle to be relatively new, under 10 years old, with some extending to 13 years. Mileage limits are common, usually 100,000 to 150,000 miles. The vehicle’s loan-to-value (LTV) ratio, comparing the loan amount to the car’s actual cash value, is assessed; lenders often prefer an LTV below 100%, though some approve up to 130%. The vehicle must also have a clear title and be for personal use.

Before applying, gather specific documents. This includes personal identification (driver’s license, Social Security number), proof of income (recent pay stubs or tax returns), and proof of residence (utility bill). Details of your current auto loan, including the lender’s name, account number, and payoff amount, are necessary. Vehicle information like the VIN, make, model, current mileage, registration, and proof of insurance must also be provided.

The Application Process

Once all necessary information and documents are prepared, the application process can begin. First, research lenders offering this specific refinance, as not all financial institutions do. Compare offers from multiple banks, credit unions, or online lenders to find suitable terms. After selecting a lender, complete their application form online or in person.

Following the application submission, you will be required to provide the gathered documents. The lender then proceeds with a review process, which includes a credit check, resulting in a hard inquiry on your credit report. A vehicle appraisal may also be conducted to verify the car’s value.

If approved, the lender will present a loan offer outlining the new terms, including the interest rate and repayment schedule. Upon accepting and signing the new loan agreement, the lender will pay off your existing auto loan. The cash-out portion, representing the difference, will then be disbursed to you, with the entire payoff and title update process often taking between 30 to 60 days.

Key Financial Considerations

Before pursuing a cash-out auto refinance, evaluate several financial aspects. The new loan’s interest rate is a significant factor; a refinance might secure a lower rate, but the increased principal balance means more total interest over the loan’s life. The loan term also influences overall cost. Extending repayment reduces monthly payments but leads to higher total interest paid, while a shorter term increases monthly payments but saves on interest.

A cash-out refinance can impact your credit score. The application initiates a hard inquiry, which may temporarily lower your score. Opening a new loan account can also affect the average age of your credit history. However, consistently making on-time payments on the new loan can positively influence your credit score over time.

Vehicle depreciation is another consideration, as cars lose a substantial portion of their value within the first few years. Taking cash out against a depreciating asset increases the risk of becoming “underwater,” meaning you owe more on the loan than the car is worth, which can pose challenges if you need to sell or trade the vehicle. Borrowers should compare offers from multiple lenders, considering all terms and conditions, and also consider other financing alternatives like personal loans or home equity options.