What Is Cash-Out Auto Refinancing & How Does It Work?

Images by Getty Images; Illustration by Issiah Davis/Bankrate

Cash-out auto loan refinancing, also known as cash-back refinancing, is like traditional refinancing in the sense that you apply to receive new, more favorable terms to replace your current loan. In the case of a cash-out refinance, however, you’re refinancing for a larger amount than what you currently owe — and you’ll receive the difference in a lump sum of cash.

In order to obtain a cash-out refinance, the value of your vehicle must be more than what you owe. Lenders may also have additional requirements that must be met. If you urgently need money, it may be worth considering this type of financing, but it comes with significant risks, including increasing your debt and the potential to be upside down on the loan.

What is cash-out auto refinancing?

A cash-out auto refinance loan allows you to swap out your current loan for a new one for a higher amount and access the difference in cash. The variance between the two loans is the amount of equity you have in your vehicle or the amount you own outright. This type of loan is typically used by people still paying off their car who have equity in their vehicle and need extra money.

Not all lenders offer this service, and it can be a risky move. Cash-out refinancing increases the possibility of becoming upside-down on your loan, making your car more challenging to sell until you’re no longer upside-down.

Lenders that offer cash-out loans

Bankrate’s view

RefiJet offers a simple and straightforward process including a streamlined rate-shopping experience through its marketplace. RefiJet also stands out for letting you view personalized rate quotes from lenders without a hard credit check.

Pros

• Claims to make the cash-out refinance process easy.
• Offers extended service contracts that can be included in your loan.

Cons

• Your vehicle must be 10 years old or newer.

Bankrate’s view

RateGenius publishes its current auto refinance rates by credit rating on its website, and the figures are updated daily. Not all lenders offer this level of transparency. In addition, you do not need perfect credit to qualify with RateGenius.

Pros

• It does not require perfect credit.
• Allows co-applicants.

Cons

• Limited information about cash-out refinances on its website.

Bankrate’s view

When working with iLending you’ll be assigned a loan specialist who will provide personalized service and help you through the process. This includes applicants who have bad credit. iLending also distinguishes itself from other lenders by accepting scores as low as 560.

Pros

• You’ll be matched with a personal lending specialist.
• It does not require perfect credit.

Cons

• Loan fees are not disclosed up front.
• No physical locations means no in-person service.

Bankrate’s view

Autopay is an auto loan marketplace offering a single streamlined application. That means borrowers can view and compare loans from multiple banks, credit unions and online lenders. This approach is also notable because it allows you to see multiple loan options without damaging your credit.

Pros

• A maximum loan term of 96 months is longer than most competitors.
• It does not require perfect credit.

Cons

• Fees are included in the APR quoted, but not disclosed.
• The competitive rates are for the best credit borrowers, but other rates are not disclosed for poor credit.

How much can you borrow through a cash-out loan?

The amount you can borrow through cash-out refinancing is dependent on a few factors. There’s no single answer — instead, it will depend on your lender, the equity in your vehicle and your finances.

• Lender choice: Few lenders offer a cash-out option due to the increased risk of default posed by increasing your debt. If the lender does offer a cash-out option, it may have specific requirements for you to meet. 
• Vehicle equity: The value of your vehicle compared to what you owe determines your equity. Some lenders will allow you to borrow up to 100 percent of the car’s value. For example, if your car is worth $20,000 and you owe $10,000 on your loan, a lender might give you $10,000 to pay off your existing loan and $10,000 in cash to use for almost any purpose. Get estimates of your vehicle’s value using a trusted source like Edmunds or Kelley Blue Book, and then use our online calculator to determine your equity. 
• Your finances: As with most financial circumstances, your credit score and history serve as the core measure for whether your loan will be approved. The better your credit is, the more favorable terms you will receive. Other financial factors that matter to your lender are your income and debt-to-income ratio.

Risks of cash-out refinancing

As with any auto loan product, cash-back auto refinance has risks. Consider these potential drawbacks before proceeding.

Going upside down on a loan

You are more likely to become upside down or underwater on your loan. As the car’s value depreciates, your loan-to-value ratio increases the likelihood of being underwater, owing more than the vehicle is worth. Having negative equity is also a major risk if you get in an accident and your insurance does not cover the full cost.

Incurring more debt

Borrowing more than you owe stacks even more debt on your plate. This can make it even more difficult for you to qualify for other credit, like a mortgage, or get out of debt. It’s best to avoid significantly increasing your debt unless you have a specific plan to repay the debt.

Potential repossession

If you struggle to keep up with your monthly payments, extending your loan may not be enough to fix deeper financial problems. This could mean your vehicle is repossessed if you fail to pay, creating an even more challenging situation of not having a car. A repossession will also impact your credit score, leaving a negative mark on your report.

Limited lender choices

Not all lenders offer cash-out auto loans, so you may be limited to a few options when shopping around. This means less competitions, and lenders that do offer with cash-out refinancing often charge much higher interest rates than the market average. 

Impact to credit score

A cash-out refinance can negatively impact your credit score in multiple ways. When you apply for the loan, lenders conduct a hard inquiry in order to review your credit report. A new loan will also decrease the average age of accounts and add to your overall debt, so avoid applying for cash-out refinancing if you need to apply for other credit in the near future.

When is cash-out auto refinancing a good idea?

Determining whether a cash-out auto refinance is right for you takes reflection on your spending habits. Because this choice means borrowing more money than you already owe, you are creating more debt. If you are currently struggling to make your monthly payments, this could worsen your financial situation.

The two primary benefits of cash-out refinancing are improved loan terms and additional cash.

1. Improved loan terms: Just as with traditional refinancing, you will ideally receive more favorable interest rates through this process. But you’ll increase your loan principal, and if you want to lower your monthly payment, you’ll likely need to extend the loan term. That means you’ll spend more on interest over the loan’s lifetime.
2. Additional cash: You will receive money from a cash-back refinance, which can be especially helpful if you need additional cash for an emergency. However, this is a short-term solution that could lead to higher interest rates.

How to apply for cash-out auto refinancing

The process of applying for a cash-out auto refinance is similar to what you would do for a traditional refinance. Here are the typical steps for applying for a cash-out auto refinance.

1. Research your vehicle’s value. To get an idea of how much your car is worth, estimate your car’s value using websites like Kelley Blue Book and Edmunds.
2. Calculate your vehicle’s equity. Next, calculate how much equity you have in the car by subtracting your current loan from your vehicle’s current value. If you want to avoid mental math, an equity calculator can handle the calculations for you.
3. Find a lender. Research lenders that offer cash-back auto refinancing. Afterward, compare the terms, such as rates and the cash back offer, to determine which option is best for you.
4. Submit application. After choosing a lender, submit a formal loan application. Once approved, you will walk away with new loan terms and extra money.

Bottom line

Cash-out refinancing can be a good option if you’re looking to score more favorable terms on your auto loan or have an urgent need for cash. The first step when considering this type of refinance is to research the current value of your car and how much you owe. This will help determine how much money a lender may be willing to give you.

But remember, there are risks involved in a cash-out refinance. You incur more debt by refinancing the auto loan for more than what’s currently owed, and you also risk becoming upside-down on the loan.

Frequently asked questions

• How do you determine how much equity your car has?
  

  Calculating equity involves determining the difference between your car’s current value and the outstanding balance on your auto loan. If, for example, you own a vehicle that is worth $15,000 and you still owe $10,000 on the loan, you have $5,000 in equity.

• Do you need good credit for cash back refinancing?
  

  While there is no specific credit score requirement, in general, you’ll need a score of at least 600 for most lenders. There are some lenders that work with borrowers who have credit scores in the 500s, but expect higher interest rates. And as with other loans, a higher score can help you qualify for more competitive interest rates.

• What types of lenders offer cash-out auto refinance loans?
  

  Cash-out auto refinance loans are offered by banks, some credit unions and private lenders. This is a rare product, so do a broad search to find lenders that suit your needs. Typically, you can expect to find cash-out refinancing with online lenders and smaller local banking institutions.