May 25, 2021

Is a Cash Out Auto Refinance Right for Me?

What are your most significant expenses when you plan your monthly budget? There’s rent, utilities, student loan repayments, insurance, savings, recreation — and of course, transportation.

According to Lending Tree, the average monthly payment for a leased car is $450, or $563 for a new one (used vehicles cost the least at $397). You might have had to take out an auto loan to pay for yours, which can come with steep interest rates, just like mortgages.

Another thing auto loans share in common with mortgages, however, is that you can refinance them, including with cash out. You might be familiar with the concept of refinancing a home loan, so let’s dive into what a cash-out auto refinance is and whether it’s right for you.

What is a Cash-Out Auto Refinance?

Refinancing is the process of replacing your current loan with a new one with more favorable terms. Refinancing loans can be a way to reduce your interest rate, adjust your monthly payments, and save money in the long run.

How a cash-out refinance works is similar, except your new loan is worth more than what you have yet to pay. It pays off the previous balance, and you pocket the difference to use how you wish. Many people refinance their homes or vehicles to pay for improvements or other debts.

How a Cash-Out Auto Refinance Works

To auto refinance with cash out, you’ll need to have equity in your vehicle. Your equity is “how much” of the car you own, which is proportionate to how much of your loan you’ve paid off.

For example, let’s say your car is worth $12,000, and you’ve paid off $8,000 (with a remaining balance of $4,000). Different lenders allow you to borrow different amounts, such as 90% of your vehicle’s value. This rate would mean you qualify for as much as $10,800, which leaves you with $6,800 after covering your balance.

The Advantages of Refinancing a Vehicle

A cash-out car refinance could make sense for you if you need some extra cash but want to avoid the dangers of taking out a personal loan. Refinancing your vehicle is an option to keep in mind during emergencies or if you have other substantial debts that can’t wait to be paid off.

It’s also possible to negotiate better loan terms. If you have a good credit score and interest rates have decreased since the first time you borrowed, you could reduce the amount you pay in interest each month.

The Risks of a Cash-Out Car Refinance

A cash-out auto refinance carries a significant number of risks. One of the most significant caveats is that it’s, well, more debt. Unless you obtain a lower interest rate than before, you’ll likely pay more in the long-term or end up with a higher monthly payment that doesn’t fit your budget. Be sure you’re in a financial position to pay whatever your new monthly payment will be, all debts included.

You also bear the risk of turning upside down on your loan. Cars depreciate in value over time (you’ve undoubtedly noticed how shiny new models are worth more), so you increase your chances of owing more than what your vehicle is worth, and therefore, have negative equity. This scenario is more likely if you borrow against close or equal to 100% of your car’s value. Your vehicle might be subject to repossession if you default on your loan.

How Much Can I Borrow?

The maximum cash-out refinance you can apply for depends on your lender. As we mentioned earlier, different lenders have different policies, such as 80% or as high as 160%, which is rare and obviously much higher than what you can borrow under a mortgage refinance.

The amount of money you’ll be able to refinance your car for also depends on your equity and credit. Refinancing your car isn’t practical if you need thousands and thousands of dollars to consolidate debt or make a significant purchase.

What Should I Do Instead?

An auto refinance to cash out on the difference between loans isn’t practical for everyone. If you’ve decided it’s too risky, you have other options for consolidating debt and saving money.

One option is to refinance your car the traditional way. Instead of borrowing more to take cash out, shop between lenders to see which offer more favorable interest rates and payment terms. You won’t get spare cash this way, but you’ll save money if you find a good deal.

If you are struggling to pay off various debts, consider rolling them into one with a balance transfer card. These cards often come with 0% APR promotional periods. You can also give HELOCs some thought, but those may be even riskier, depending on your situation.

Before you borrow money from a lender, assess your situation to determine where your core problems lie. Do you not have enough money to pay your debts, or do you make enough but don’t have access to it when you need it? In the latter case, you can use an app like Earnin to access your paycheck for hours you’ve already worked ahead of payday to pay your bills on time.

A cash-out auto refinance can be a quick way to get some extra cash and a better car loan, but remember that it comes with significant risks, and you’ll have to meet lenders’ requirements.

Photo by Dan Gold on Unsplash

Please note, the material collected in this blog is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or Services.

EarnIn is a financial technology company, not a bank. Bank products are issued by Evolve Bank & Trust, Member FDIC. The EarnIn Card is issued pursuant to a license from Visa USA Inc.

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