When you refinance your car loan, it's to lower your monthly payment and possibly save money in the long run. But can you get extra cash in your pocket from refinancing? Possibly – if you have equity in your vehicle and work with the right lender. Here's what we know about cash-out refinancing.
Getting money back from refinancing. When you do a cash-out refinance, you’re still replacing the terms of the old loan with new ones, but you may also get cashback from the equity that you had in the car. To get cash back when you refinance, you must have equity in your vehicle, and you must also qualify for refinancing.
Once you find a lender that can refinance your auto loan, you sign the new loan contract and the lender sends the payoff check to your old lender. If you refinance a car with equity (you can also refinance a vehicle with an actual cash value equal to the loan balance), you can choose to receive that equity in the form of a check. The amount of the check will be the difference between your car’s actual cash value and the payoff amount.
Is cash-out refinancing worth it? If you take the equity in cash, you no longer have equity in your vehicle, and you once again risk being underwater on your loan. Additionally, if you need to immediately trade the car in for another one, you won’t have any equity to put toward your next auto loan. Keep in mind that you can’t get money back from refinancing if you don’t have equity in your vehicle. And if you only have a small amount of equity, it may not be worth taking the cash.
Determining if Your Vehicle Has Equity
Is there equity in your car? To figure out if your vehicle might have equity, start by contacting your lender and requesting a 10-day payoff. The total includes the current loan balance plus 10 days of additional interest charges. Once you have the payoff, you can get an estimate of your car’s value by using online valuation services such as Kelly Blue Book or NADAguides. These sites only provide a quick estimate of your vehicle’s value, but they’re a good starting point.
Compare the estimated values to the payoff amount. If you owe less on the auto loan than what the car is worth, congratulations because you may have equity and might be able to do a cash-out refinance if you find the right lender. Now may be a good time to see what your vehicle is worth since the recent inventory shortages are seeing the prices of used vehicles rise. This means a dealership may be willing to offer you more for your car/
However, if you owe more on the vehicle than its current value, you’re in a negative equity position, also known as being underwater on your auto loan. You can’t do a cash-out refinance, or refinance at all if you have negative equity.
You can solve this problem by continuing to make payments and waiting things out until your car’s actual cash value is more than, or equal to, the loan balance.
Refinancing a Car Loan
Do you qualify for refinancing? If you have equity in your car, the next step is figuring out if you qualify for refinancing. Every lender is going to vary in their requirements, but these are the usual refinancing requirements:
- Your car has fewer than 100,000 miles
- Your car is less than 10 years old
- Your credit score is good or has improved since the start of your loan
- Your loan is at least a year old
- You're current on payments with a good payment history
- Your loan amount isn’t too high or too low
If you, your vehicle, and your loan qualify for refinancing, you may be able to qualify for refinancing, and get that equity in the form of cash.
Why refinance? Borrowers usually refinance their auto loans to save money, either monthly and/or throughout the loan term. If you financed your car with an interest rate that was higher than you would have liked, refinancing can be a great way to pay less overall while giving you a more manageable monthly payment. You can refinance in a few ways:
- Extending your loan term – When you extend the loan term, it can give you more disposable income month to month. However, it won’t save you money overall. In fact, a longer loan term with the same interest rate means you pay more overall due to the increased interest charges.
- Lowering your interest rate – By lowering your interest rate, you save money over the entire loan term by lowering your monthly payment. This is the ideal way to refinance your auto loan.
- Both extending your loan term and lowering your interest rate – By doing both, you might lower the total interest charges as well, depending on how long you extend the loan.
If refinancing isn't for you. If you decide to cash-out vehicle equity, do it wisely. Many borrowers use equity to help with future car purchases since it can be used as a down payment. Having plenty of equity is an ideal position to be in when you have an auto loan.
However, if you don’t think that refinancing is for you, but you need some extra cash month to month, trading in your current vehicle for something more affordable could be the right move. A trade can get you out of a vehicle you no longer want and into something cheaper. And, any equity can even be able to help you with the down payment on your next loan.