A cash-out refinancing of your car loan can get money in your pockets pretty quickly, but there can be some cons to going through with one.
Cash-Out Refinancing and Your Car Loan
The most important requirement of a cash-out refinance is having equity in your car. Without equity, it isn’t possible. Most lenders don’t finance/refinance a vehicle for more than it’s worth. In almost every case, the amount of money you can get after a cash-out refinance is dependent on how much equity you have in your vehicle.
If you need some funds quickly, and you have equity in your vehicle, then a cash-out refinance could be the solution. By doing this, borrowers cash out the equity in their cars for some quick money to pay off other debts, bills, or even make vehicle repairs.
Here’s an example of the process:
Say you only owe $2,000 on your auto loan, but your vehicle is worth $5,000 – you have around $3,000 in equity. If you apply for a cash-out refinance and qualify, you get a new loan contract for the car’s entire value of $5,000. Since you only owed $2,000 on your original loan, the new lender pays it off and you get $3,000 in cash. The lender may send you a check for a lump sum or several checks in installments, depending on your situation and the lender.
When you refinance your auto loan, you’re replacing the loan with a new one on the same car. Most borrowers who opt to refinance their vehicle, do it to get a lower monthly payment. On the other hand, a cash-out refinance means you take on a new auto loan that pays off your current one and gives you additional money in your pocket.
Pros and Cons of a Cash-Out Refinance
Now that you understand how cash-out refinancing works, let’s get into the pros and cons of going through with the process.
Pros of a cash-out refi:
- You can get cash fast – If you need cash for unexpected expenses, need to make repairs on the car, or for anything else, a cash-out refinance can help.
- Different lenders – Borrowers who refinance typically do so with a different auto lender. If you’re unhappy with your current lending institution, then refinancing could mean you get to work with a different lender; possibly one that can offer lower rates for your situation while getting money in your hands quickly.
Cons of a cash-out refi:
- You may fall into negative equity – Negative equity is when you owe more on the car than what it’s worth. A cash-out refinance involves adding more to your loan balance. If something happens to your vehicle that lowers its value while you’re financing, you may end up in negative equity.
- Possibly longer loan term – Since you’re adding more to your loan amount, you may need to stretch your loan term to afford the monthly payments. This could also mean a few more years of car payments.
- Selling the vehicle may be difficult for a little while – If your loan balance is equal or close to what your car is worth, then it may be difficult to trade-in your vehicle for what you owe. It’s possible, but it can become difficult if you need to sell the vehicle soon after you cashed out the equity.
Quick Overview of Vehicle Equity
Before you can cash out the equity in your vehicle, you need to know if you have any. If you owe less on your auto loan than what the vehicle is worth, it’s called having equity. To figure out how much equity you may have in your car, compare the amount you owe on your loan to your vehicle’s estimated value.
You can check your car’s estimated value on websites such as Kelley Blue Book, NADAguides, or Black Book. Next, see how much you owe on your auto loan. Most lending institutions allow for online loan management, so you may be able to view your loan balance online. If not, contact your lender and ask for a 10-day payoff amount – this is your loan balance plus 10 days of interest charges.
Think Carefully Before Moving Forward
A cash-out refi could mean cash in your pocket right away, but you’re also increasing the amount you owe on your vehicle. If you intend on selling the car soon after you cash out the equity, it could be difficult to get enough money to pay off your loan.
However, if you’re in a tough spot and you don’t want/need to sell the car for a while, then moving forward with cash-out refinancing could be for you.
Another option you have is selling the vehicle for a profit, and pocketing the profit from the sale proceeds after you pay your lender for the remaining loan balance. However, you may need another car after the sale! If this is the path for you, then consider working with us at The Car Connection.
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