What Is Cash-Out Auto Refinancing and How Does it Work?

What Is Cash-Out Auto Refinancing?

A cash-out auto refinance is similar to a cash-out refinance on a mortgage, which allows you to replace your current mortgage loan and take some of the equity you have in your home in cash.

Like a regular auto refinance, your new loan will cover the remaining balance on your original loan and possibly nab you a lower interest rate, modified loan term or both. Where a cash-out auto refinance differs from a regular refinance, however, is that your new loan will be larger than your original loan.

You'll receive the difference between the loan amounts, and you can use the funds to consolidate debt, pay bills, make purchases or just about anything else you'd like—though there may be some restrictions.

Example: Let's say your car is worth $10,000, but your loan has a remaining balance of just $2,000. If you refinance your loan for $10,000, you'd receive the $8,000 difference in cash.

How Much Money Can I Get With a Cash-Out Auto Refinance?

Depending on the lender, you may be able to refinance your auto loan for up to 130% of the car's value. That said, the additional amount you can borrow with a cash-out refinance auto loan will depend on a few factors, including:

• How much you owe
• The vehicle's value
• Your chosen lender
• Your creditworthiness

When you apply for a cash-out auto refinance, the lender will review these factors to determine whether you qualify and how much you can borrow.

Learn more: What Is Equity on a Car Loan, and How Can You Use It?

Pros and Cons of Cash-Out Auto Refinancing

Although there are some clear benefits to a cash-out auto refinance loan, it's also important to consider the potential drawbacks and risks. Here's what to keep in mind.

How Does Refinancing an Auto Loan Affect Credit?

A cash-out auto refinance loan can impact your credit in a few ways. Understanding these influences can help you determine whether it's the right move.

• Applying: When you first apply for the loan, the lender will check your credit, which results in a hard inquiry on your credit report. This can temporarily lower your credit score by a few points. If you shop around, all of your hard inquiries will be combined into one for credit score calculations, as long as you complete your rate-shopping within a short period—14 to 45 days, depending on the credit score model being used.
• New loan: If approved, the new auto loan will also reduce your average age of accounts, which impacts another important score factor: the length of your credit history.
• Higher loan amount: Increasing how much you owe can also negatively impact your credit score, especially if it's a significant jump.

Keep in mind, though, that the impact of these factors is typically temporary in nature. As long as you make your payments on time and manage your other debts well, you likely won't see any long-lasting negative effects with an auto loan refinance.

Is a Cash-Out Auto Refinance Worth It?

There's no one-size-fits-all answer to whether a cash-out auto refinance is right for someone. As such, it's crucial that you take the time to consider your situation, your reasons for wanting one and other alternatives you have to accomplish your goal. Here are some things to consider:

• Current equity: Check your loan balance and use a vehicle valuation tool, such as Kelley Blue Book, to get a sense of how much equity you have in your car. This will give you an estimate of how much you can borrow and whether that's enough to meet your needs.
• Creditworthiness: Register with Experian to get free access to your Experian credit report and FICO^® Score^☉. These resources will help you determine whether you're in a good enough position to qualify for favorable terms on a new loan.
• Alternatives: Depending on your needs, it may make more sense to consider other financing options, such as a personal loan, home equity line of credit or 0% intro APR credit card.
• Budget: Check your budget to determine whether you can afford to take on a higher monthly payment and how that might impact your other financial goals and obligations.

How to Apply for Cash-Out Auto Refinancing

The process for obtaining a cash-out auto refinance loan is largely the same as a traditional refinance loan. The primary difference is that you're asking for more money. Here are some steps you can take:

1. Shop around. Seek out three or more lenders that offer cash-out refinance loans and get prequalified or preapproved so you can compare eligibility criteria, interest rates, loan amounts, repayment terms and other features that are important to you.
2. Submit a loan application. Once you've identified the lender with the best offer, submit an official application with them. You'll provide information about yourself, your income, the vehicle, your insurance policy and the existing loan.
3. Accept the loan. If approved, it's important to review the loan agreement in its entirety. If you agree to the terms, sign the agreement to accept the loan.
4. Finalize the loan. After you accept the loan, the lender will pay off the original loan and issue you a check for the difference or deposit the funds into your bank account. If you own the car outright, you may need to mail the title to the lender.

The Bottom Line

A cash-out auto refinance loan can be a useful tool for accessing your vehicle's equity. However, it's crucial to evaluate your situation and weigh both the benefits and the drawbacks to determine if it's the right move for you.

Throughout the process, it's important to monitor your credit to understand how your actions affect your score. If you're working to improve your credit, regular monitoring can also make it easy to track your progress.