Benefits of a Cash-Out Refinance

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Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

, Content Manager - November 23, 2020

If you’ve got a car loan and you need some money, a cash-out refinance could be your answer. There are some requirements that you need to meet, but it could have many benefits.

What Are the Benefits of a Cash-Out Refinance?

Refinancing is replacing your current auto loan with another one. With a cash-out refinance, you’re cashing out any equity that you had in the car loan. Because you’d be cashing out your vehicle’s equity, you need to be in an equity position, where the car is worth more than you owe on its loan.

For example, say you have a vehicle that's worth $10,000. If you only owe $6,000 on it, so you could cash out that equity when you refinance and get that $4,000 in your pocket. This is done by taking that $6,000 you still owe and turning that into a new loan.

Besides cashing out your equity and getting some quick cash, another benefit of refinancing is that it could save you money on your auto loan in the long run. Most times, borrowers refinance their car loans to lower their monthly payment.

Some borrowers do this by qualifying for a lower interest rate. If you qualified for a higher interest rate when you first started the loan but your credit score is better now, then you may be able to get a lower one. A lower interest rate can save you lots of money over your loan term.

You may also be able to extend your auto loan to lower your car payments. However, stretching out the amount you owe over a longer period of time increases the amount you pay in interest charges.

If you lower your interest rate and lengthen your loan term, it can mean even more savings each month. However, be cautious about stretching your auto loan too long, since car loans usually use simple interest.

With simple interest, your interest charges are accrued daily, so the longer you owe on the vehicle, the more you pay. But if you’re struggling to keep up with payments each month, refinancing to a longer loan term could be a big plus for you.

If you can get a low enough interest rate when you refinance, then extending your loan term may not cost you as much – but you’ll have to do the math to know for sure!

Requirements of Auto Refinancing

To refinance your auto loan and cash out the equity, there are some requirements you must meet. Additionally, most borrowers look for a different lender than originally financed their car, but you can try to refinance with your current lender.

Whether or not you qualify for a cash-out refinance can depend on the remaining balance of your loan, and the lender you’re applying with. However, most lenders have similar refinancing stipulations:

  • You’ve had your auto loan for at least a year
  • Your vehicle isn’t over 10 years old and has less than 100,000 miles
  • You have equity
  • You don’t owe too much or too little on your loan
  • Your credit score is good or has improved since the start of your loan

Not everyone has the ability to refinance, but if you can, it can be a great way to save cash on your auto loan. If you have a lot of equity, you could cash it out when you refinance and use it for other things!

Why Doesn’t Everyone Do a Cash-Out Refinance?

It’s not always the best idea to cash out all of your equity. For many borrowers, they use their equity to put toward their next car in the form of a trade-in.

If you were to cash out your vehicle’s equity, and then need to trade it in a little later, the trade-in amount may only be enough to cover your loan’s leftover balance – or worse, it may not even cover it. This leaves you in a negative equity position. If you owe more on the car than it’s worth, then you’re in a negative equity position.

However, if your vehicle is in good shape and you plan on keeping it for a few more years, then doing a cash-out refinance may still be a good idea for you. If your car is getting on in years, and you’re not sure that refinancing is in the cards, then consider trading it in for another one and using that equity to knock down your next vehicle’s selling price.

Considering a Trade-In Instead

If you’re on the lookout for another car and you have equity in your auto loan, it may be a better idea to trade it in to lower the selling price of your next one. Many borrowers use trade-ins and/or a down payment to lower their monthly payment on their next loan, or just lower the amount they need to finance. With less than perfect credit, down payments are a requirement too, and trade-ins can help meet this requirement.

Looking for the right dealership for your credit score isn’t always easy, but we’re striving to take the hassle out of it. Here at CarsDirect, we’ve gathered a nationwide network of dealers that are signed up with bad credit auto lenders – ready to work with borrowers in all sorts of unique credit circumstances. To get matched to a dealership near you in our network, fill out our free car loan request form.


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, Content Manager

Bethany Hickey is a Content Manager and Writer for Auto Credit Express, CarsDirect, and many other automotive blogs. She's a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. 

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