To do a cash-out refinance on a vehicle, it needs to have equity. If you’re underwater on your auto loan, it means you have negative equity. Here are the requirements of a cash-out refinance, and how to figure out your car’s equity position.

Cash-Out Refi and Negative Equity

If you’re interested in cash-out refinancing, this is vital to qualifying: your vehicle must have equity – no ifs, ands, or buts about it. If your vehicle doesn’t have equity, you have nothing to cash out.

If your car loan is underwater, or upside-down, it means you owe more on your car than what it’s worth. Vehicles are depreciating assets, so they lose value over time. When you take on an auto loan and it isn’t paid down quickly enough or your car loses a lot of value quickly, it can put you in a negative equity position.

Other requirements for cash-out refinancing typically include:

  • The vehicle has less than 100,000 miles
  • The car is less than 10 years old
  • You’ve had your auto loan for at least one year
  • Credit score requirements vary, and many refi lenders require your credit score is better than it was when you first started the loan

Lenders of all types, refi or otherwise, generally require that your vehicle is in good condition with lower mileage to qualify for financing.

How Cash-Out Refinancing Works

Cash-Out Refinance on Underwater Car LoanA cash-out refinance involves taking the equity out of your vehicle and turning it into cash. Essentially, you’re taking on a personal loan for the value of the car, and using the vehicle as collateral.

Say you have a car that’s worth $5,000 and you only owe $1,000 its loan. That would mean you have approximately $4,000 in equity. You could apply for a cash-out refinance and refinance the vehicle for its value, turning the $1,000 loan balance into $5,000. You then get a check for the equity: $4,000. You repay the lender in installments, with interest.

Figuring Out Vehicle’s Equity Position

If you own your vehicle outright, then its entire value is equity. But if you still have a loan on your vehicle, follow these steps to figure out your car’s equity position:

  1. Get your loan payoff amount from your lender.
  2. Use online valuation sites to get an estimated value of your vehicle.
  3. Compare the loan balance to your vehicle’s estimated value.
    • If you owe less on your loan than the car’s value, then you likely have equity.
    • If you owe more than the car is worth on your loan, then your vehicle has negative equity.

If your loan balance is the same (or very close to) your vehicle’s value, your car is technically in an equity position, but it also means that you still wouldn’t have much, or any, equity to actually cash out.

Remember that the lender that you apply with for the cash-out refi is going to be the one determining your vehicle’s actual cash value (ACV). The estimates you receive from online valuation sites, such as Kelley Blue Book, are just estimates and may not reflect the actual value and condition of your car. However, estimates may be able to give you some negotiation power with the lender during the process.

Should I Cash Out My Equity?

If you’re eligible for a cash-out refinancing auto loan, it’s wise to proceed with caution. Remember that it’s a personal loan that uses your vehicle as collateral. If you miss a payment, have too many late payments, or your auto insurance lapses, your car is at risk for repossession by the lender.

Cash-out refinancing is usually considered a last resort, since it could lead to putting your vehicle in a negative equity position when it was originally in an equity position. When you have equity, it’s easier to sell your vehicle for profit, since you’re more likely to get an offer large enough to pay off your loan. If you need to sell the car, you must repay the lender the full loan balance before you can sign the title over to a buyer. In a negative equity position, it can be much harder to get a large enough offer to officially sell your vehicle.

If you plan on selling your car in the near future, doing a cash-out refinance car loan may not be a good move right now. Consider the future of your vehicle before going through with a cash-out refinance.

Need Auto Loan Resources?

At Auto Credit Express, we’re here for all things automotive special financing. If you’re looking to refinance your vehicle, visit our resource center for more information and connections to refinancing lenders.

For borrowers in need of a car loan and have poor credit, our free auto loan request form is a great place to start! Simply complete the no-obligation process and we’ll look for a special finance dealership in your local area that assists credit-challenged borrowers.