If you need some extra cash, or you want to lower your monthly auto loan payment, a cash-out refinance could be for you. Sound too good to be true? There are some requirements you’re going to need to meet, but a cash-out refi could get money in your hands, change your car loan terms, and save you more cash down the line.
What Is a Cash-Out Refinance?
While many people do a cash-out refinance on their mortgage, it’s available to do on your auto loan as well. It works similarly to regular car loan refinancing, where you replace your original loan terms with another loan (usually with more favorable terms), but you also take out the equity in cash.
Some people do a cash-out refinance so they can pay other bills, or use the equity to put toward another big purchase. It shouldn’t be taken lightly, and there are a number of requirements you’re going to need to meet.
To refinance your vehicle at all, you need equity in your car. Equity is the difference between what you owe and what your vehicle is worth. If you owe less than the car’s value, that difference is your equity.
Say you have a vehicle that has an estimated value of $10,000, but you only owe $7,500 on the loan. That means you likely have around $2,500 in equity. And if you find an auto lender that’s willing to refinance your loan, you could cash out that equity.
Having equity, or at least not having negative equity, is crucial to getting approved for refinancing – even if you didn’t want to do a cash-out refi. Negative equity, also called being underwater or upside down on your loan, is the opposite scenario. You can’t refinance at all in this position because you owe more than your car is worth.
Do You Have Enough Equity to Cash Out?
If you have equity in your vehicle, one of your first steps in starting a cash-out refinance is figuring out how much equity you have. You can get an estimate pretty easily by using the internet and making a quick call to your auto lender.
Contact your lender and ask for a 10-day payoff. This amount is sum of the remaining balance of your loan and 10 days of additional interest charges.
Now, you can use online valuation services to get an estimated value of your car. Sites like NADAguides or Kelley Blue Book are great resources, but be honest about your vehicle’s condition to get the most accurate estimate you can, or you might be disappointed if you get the car appraised.
Once you have the 10-day payoff and the estimated valuation of your vehicle, if you owe less on it than the value, that difference is your equity. You’ve checked the first box of the qualifying for a cash-out refi!
However, if you don’t have a lot of equity, it may not be worth it to do a cash-out refinance. If you owe close to what the car is valued at, you may not get a lot of cash and the process may not be worth your while.
Keep in mind that if you cash out all the equity you have in your vehicle, you could risk being underwater on your loan. Also, if you need to trade the car in, you won’t have any equity to put toward your next vehicle purchase. If you decide to pursue a cash-out refi, be sure to think hard on it before liquidating your car’s equity.
Basic Requirements for Refinancing
Not every lender can do a cash-out refinance, and depending on your vehicle and your loan, it may not be possible all the time.
Besides having equity, there are a number of other requirements you and your car need to meet. Lenders vary, but you can generally expect these common qualifications to qualify for refinancing:
- Your credit score has improved since the start of the loan
- Your loan is at least one year old (and some require you have at least two years left)
- Your vehicle is less than 10 years old
- Your car has fewer than 100,000 miles
- You are current on payments, and have a good payment history
- Your loan amount isn’t too high or too low (varies by lender and your vehicle)
The specifics behind these requirements are going to vary by lender, so be sure to ask.
Ready to Refinance?
If you’re ready to look for a lender that can refinance you, check out our refinancing partner who can look for a lender for you online if you fill out the request form at the top of the page.
However, if doing a cash-out refinance doesn’t seem like the route for you, you could trade-in your car and get into something else. We can help with that, too!
Here at Auto Credit Express, we’ve got lender connections since we have a coast-to-coast network of dealers that work with borrowers in all sorts of unique credit situations. We match borrowers to dealerships that work with bad credit lenders, so fill out our free auto loan request form and we’ll look for a dealer near you!