While you can’t technically use your auto loan to pay down debts, there is a way to use your car’s equity if you need to. It’s called a cash-out refinance, and it can help you pay off debts if you’re in a pinch. Here’s what you need to know.
Using Your Auto Loan to Pay Off Other Debts
You can use your vehicle’s equity to pay down other debts if your car loan is in the right situation. It’s done by refinancing your auto loan and cashing out its equity, called a cash-out refinance.
Refinancing involves replacing your current car loan with a new one. Borrowers almost always refinance their auto loan to lower their monthly payment, but those with a lot of equity can take that equity out and use it to pay bills, debts, or anything else.
If you cash out your equity, you can use it for whatever you’d like – it’s your money! But, to turn that equity into cash in your pocket, you must have equity in your car loan! This means that you owe less on the vehicle than it’s worth.
Having equity in your auto loan is very useful. Many borrowers use it to lower the cost of their next car purchase, though you could use it to pay off any debts that need attending to.
The first step in finding out if a cash-out refinance is right for you is determining your equity position. You can get free estimates of your vehicle’s value by using online valuation sites, such as NADAguides, Black Book, and Kelley Blue Book.
These sites generate your car’s estimated trade-in value and private-party average selling price. Once you have a ballpark estimate of your vehicle’s value, subtract it from your auto loan balance. This can give you a rough idea of where you stand, but remember that these are just estimates.
Requirements of a Cash-Out Refinance
Having equity in your car loan isn’t the only requirement for a cash-out refinancing! Other typical requirements include:
- You’ve had your auto loan for at least one year
- Your credit score is good or has improved since the start of the loan
- Your vehicle has less than 100,000 miles on it
- Your car is less than 10 years old
- You don’t owe too much or too little on the loan
If you meet these requirements, and you have equity you want turned into cash, then it’s time to look for a refinancing lender. While you can try to refinance with your current lender, most borrowers look for another one to refinance with.
Don’t Have Equity to Cash Out?
Having equity is the most important requirement to cash-out refinance your auto loan. If you don’t have equity, it’s called being in a negative equity position. It’s a more common situation than you may expect.
Many borrowers start out in a negative equity position at the beginning of their car loan. Once some time has passed and you’ve paid down some of your loan, you could start to earn equity. However, it can be difficult to do if your interest rate is high or your vehicle is losing value quickly.
If your auto loan isn’t working for you, but your credit isn’t the best right now, then consider a subprime car loan. This type of vehicle financing is for borrowers with poor credit, and these lenders can assist borrowers in tough credit circumstances because they consider more than just your credit score for an approval.
Finding Bad Credit Auto Financing
Here at Auto Credit Express, we have dealership and refinancing lender connections. Not everyone can qualify for a cash-out refinance, though. To earn equity that can be cashed out, you need an auto loan that works for you.
If you need to get a car loan, we can also help connect you to a special finance dealer in your area. To get matched to a dealership that’s signed up with subprime lenders, fill out our free auto loan request form. Get started now!