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    Can I Refinance My Auto Loan To Cash Out My Equity?

    Damien Frost
    Damien Frost - 2020-08-30T21:00:00.000Z
    Car_Loan_To_Cash-Out_Equity

    Cash-out financing can help improve interest rates and auto loan terms. Most importantly, it puts additional cash in your wallet. It does this by replacing your existing car loan with a new loan. The amount of money you’ll receive is directly dependent on the total amount of positive equity you have in the vehicle. This equity is the difference between the car’s present worth and the total outstanding debt on the car loan.

    If you’re thinking about getting a cash-out refinance, keep reading for some important factors to consider.

    What Is A Cash-Out Refinancing? 

    Cash-out refinancing is a process that permits you to convert your car equity into cash. The process allows you to reduce the monthly payments or even the rate of interest. This will result in some extra cash in your pocket. 

    The amount obtained thereafter can be used to pay off interest debts, big-ticket purchases, medical bills, home improvement, and so forth. Most borrowers go for refinancing to save money. 

    How Does It Work? 

    Cash-out refinancing the auto loan is a process in which one replaces the current auto loan for a new loan. This leads to some additional cash once the loan is closed. Here’s how it works: 

    • The individual will need to be qualified in order to start the process
    • The process of cashing-out your equity is similar to the process of getting a traditional refinancing loan for a car 
    • The first step is to work on getting the worth of the car
    • Compare the fair market value of the car with the amount you currently owe. This will help you learn about the equity regarding your specific vehicle 
    • Get in touch with lenders who offer these loans. Make sure to check on the available terms and information while applying 

    Pros of Cash-Out Refinance 

    • Reduced rate of interest: Upon opting for this type of refinancing, the rate of interest will automatically be reduced for your existing car loan 
    • Debt reduction: It can also help with repaying debt that’s out of control. Whether it’s payments regarding credit cards or loans with an increased interest rate, cash-out refinancing can supply additional cash to work on reducing outstanding debt balances
    • Boost your credit score: Surprisingly, it helps in boosting the credit score to a great extent. The model of credit scoring uses a method termed "credit utilization" to calculate the credit score
    • Tax Implications: There are no tax implications for refinancing an auto loan. A cash-out refinance would help in writing off the interest on the loan if the auto is for business purposes

    Drawbacks of Cash-Out Refinance 

    • Risk of repossession: Missing out on payments will increase the risk of losing your car. Cash-out refinancing would combine unsecured debts and worsen the situation 
    • New terms of loans and costs: A cash-out refinance comes with various other closing costs and additional fees that are worth considering. Be aware of the rates, terms, and conditions 
    • Short term solution: A car or house is a valuable asset for you. Risking it with a cash-out refinancing option is surely not advisable. It’s just a short-term solution and wouldn’t diminish the risks permanently

    What You Will Need to Refinance Your Loan 

    • Credit Score: Check your credit score. The rate of interest that’ll be offered to you is largely dependent on your credit score. The higher your credit score is, the better the chances of securing lower rates
    • Documentation: Prepare the list of documentation required. The process would require documents like remaining tenure, balance to be paid, penalty, personal documents, and so on 
    • Compare the lenders: Properly research different lenders and know the different interest rates available. When the list is ready, compare and calculate different charges for the best deal
    • Application and closing: Once you’ve chosen the lender, it’s time to apply. The new lender will close the previous loan and transfer the car loan to the name of the new lender 

    Top 3 Refinance Lenders 

    • Autopay: Autopay is an online lender market offering 5.49% interest rates. Pre-qualification is easily verified without any impact on the credit score. This lender offers many different refinancing options 
    • RateGenius: RateGenius is an online website providing cash-out refinancing services from around 150 lenders for comparison in around 50 states. The portal helps with a 2.99% interest rate and an average saving of $76 per month. The lender assists the borrower in an easy three-step process 
    • CapitalOne: CapitalOne is a lender that refinances new cars as well as used cars, including mini cars and SUVs. There are particular state fees that’ll need to be paid. However, there are no prepayment penalty charges or application fees

    Bottom Line

    Cash-out refinancing is an option that comes with potential advantages and disadvantages. Hence, if you’re thinking about going with this refinance option, you’ll need to consider all aspects. Remember to calculate your overall benefits before making the final decision.