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What you need to know about refinancing a car with cash outlay
by
Irene Scott
September 29, 2023
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Cash-out auto loan refinance, also known as cash-out refinance, is similar to a traditional refinance in that it requires new, more favorable terms to replace the current loan. In addition, under refinance you will receive a cash-out payment in a lump sum. The amount received depends on the net worth of the vehicle.
Car owners may consider this type of refinancing if they have an urgent need for cash, but it involves an increase in the borrower's debt.
What is cash-out refinancing?
Cash-out auto loan refinancing allows the borrower to adjust their current loan and refinance it for an amount greater than their debt, receiving the additional amount in cash. This type of loan is generally used by those in need of extra cash.
The process takes the value of the vehicle and converts it to cash to take with you. This way, when you refinance your existing loan to new terms, you get extra money in the form of cash, borrowing more than the actual value of the car. But not all lenders offer this service. In addition, this procedure carries a higher risk of ending up with a loan in the red, making it more difficult to sell the car until you are no longer in the red.
Being in the red means that the loan balance is higher than the value of the vehicle. In other words, if you owe $4,000 on an auto loan, but the value of the car is only $2,000, you are in the red. If you are not going to sell the car, the overdraft is not necessarily a problem. Just keep paying the monthly installments and repay the loan.
If, on the other hand, you hope to sell the car, the overdraft can be a problem. In this case, you will have to repay the negative equity yourself.
How do you apply for auto refinancing with overdraft?
The procedure for applying for auto refinancing with overdraft is similar to that of traditional refinancing. It simply involves some administrative and research formalities. After determining the current value of your vehicle (by consulting sites such as Kelley Blue Book), you will have an idea of the amount of the vehicle's net worth. This figure will tell you how much money you can potentially receive.
To know how much equity you have in your vehicle, you need to calculate the current value of the car minus the balance you still owe. If you want to avoid doing mental calculations, a net worth calculator can do it for you.
Finding a lending institution that offers auto refinancing with cash back requires a little more effort. Not all lenders offer this service. Once you have researched the different lenders, compare terms and conditions and decide which option is best for you. Pay particular attention to the amount you will receive. Once the loan has been applied for and approved, you will receive new loan terms and additional money.
When is cash-out auto refinancing a good idea?
To determine whether a cash-out auto refinance is right for you, you need to consider your spending habits. Because this option involves borrowing more than you already have, it creates additional debt. If you are already struggling to meet your monthly payments, this could make your financial situation worse.
The two main advantages of cash-out refinancing are:
- Better loan terms. As with traditional refinancing, you will ideally get more favorable interest rates with this process. However, you will increase the principal amount of your loan and, if you want to reduce your monthly payments, you will probably have to extend the term of the loan. This means that you will spend more in interest over the life of the loan.
- Extra money. Refinancing with cashback allows you to benefit from cashback, which can be especially useful if you need extra money in an emergency. However, it is a short-term solution and can carry higher interest rates.
Car refinancing with cashback is a good idea if you have had a financial emergency and need the money, or if you intend to use the money to pay off high-interest debts, such as credit card debt.
How much can I borrow with a home equity loan?
The amount you can borrow, and therefore the amount you will receive, depends on a number of factors.
- The lending institution. Not all lenders offer the buy-to-let option because of the higher risk of default associated with higher debt.
- The value of the vehicle. The value of the vehicle determines the amount the lender will give you.
- Your credit history. As in most financial situations, credit rating and credit history are the main criteria for loan approval. The better your credit, the more favorable the terms will be.
Risks associated with cash-out refinancing
Before opting for cash-out refinancing, it is important to consider all the risks involved.
- Risk of early loan repayment. You are more likely to find yourself at or below the end of the loan term. As the value of the car depreciates, the loan-to-value ratio increases the likelihood of being below the loan level, i.e., owing more than the value of the vehicle.
- Taking on more debt. Borrowing more than you owe allows you to accumulate even more debt.
- Risk of foreclosure. If you have difficulty paying your monthly installments, extending the loan may not be enough to solve more serious financial problems. In case of nonpayment, the vehicle may be repossessed.
- Few lenders to choose from. Not all lenders offer this type of financing, so you have few options.
Cash-out refinancing may be a good option if you are looking for more favorable terms on your auto loan or if you are in urgent need of money. The first step in considering this type of refinancing is to research the current value of your car. This will help you determine the amount a lender might be willing to give you.
Keep in mind, however, that cash-out refinancing involves risk. By refinancing your car loan for more than you currently owe, you incur more debt and run the risk of ending up in an over-indebted situation.
