Unlike homes, cars generally depreciate in value over time. However, if you have equity in your vehicle, you may be able to unlock that value with an auto refinance loan with a payout.
Refinancing a car with payout is a relatively simple process, but there are some potential risks. Understanding how they work can help you determine if getting one is right for you.
What is a cash out refinance car loan?
Similar to a Cash Out Mortgage Refinance, a cash-out auto refinance allows car owners to access a portion of the equity they have in their vehicles. For example, if you owe $20,000 on your car loan and the car is worth $30,000, you have $10,000 in equity.
If you refinance your loan with a new $30,000 loan, you will receive the $10,000 difference in cash, direct deposit into your bank account, or check.
However, a key difference between payoff auto loans and home loans is the maximum amount you can borrow.
For a payoff mortgage refinance, many lenders will only allow you to borrow up to 80% of your home’s value, although some may be higher. However, you can potentially get up to 130% of the vehicle’s value with an auto-pay refinance. This percentage is known as the loan-to-value ratio.
Additionally, cash-out auto refinances typically do not have upfront costs. In contrast, a cash-out mortgage refinance may be required closing costs Costs up to 6% of the loan amount.
While a home refinance with a payout can take a month or two, an auto refinance with a payout can only take a week or two.
How does an auto refinance with payout work?
To get an auto-pay refinance, first contact the lenders directly to submit applications. Some may even allow you to to be approved in advance before you apply. You can also contact your existing lender to see if you can achieve your goal without moving to a new financial institution.
However, before you apply, check each lender’s website to get an idea of their requirements and how much you can borrow.
Note that many lenders may not state on their website or even in their applications that they offer a withdrawal option. If so, you may need to speak to a loan officer to see if you can do this.
Once you submit your application, lenders typically use an assessment guide like the National Automobile Dealers Association book to determine the amount value of your vehicle. They also take into account the age and mileage of the car – some lenders may reject your application if the car is too old or has too many miles. Finally, they do a credit check to determine your eligibility and interest rate.
Once the underwriting process is complete, the lender will provide you with their interest rate quote and the amount you can borrow based on your application details, the value of your car, and its loan-to-value limit. You can borrow up to the amount the lender is offering or less. Review and sign the loan agreement and you should receive your money within a few business days.
Pros and cons of an auto refinance with payout
Auto refinance with a payout can be a good option for some vehicle owners, but there are some risks you need to consider before applying.
- You can finance cheaply. If you need money for debt consolidation, renovations, or other purposes, you may be able to get a much lower interest rate with a payout auto refinance compared to a personal loan. You also don’t have to deal with the expensive closing costs of an payable mortgage refinance or home equity loan.
- You could get a better price. If your Credit has improved Because you completed your existing car loan, or interest rates in general have fallen, you may be able to secure a lower interest rate than you are currently paying.
- You could lower your monthly payment. Depending on the terms of your existing and new car loan, you could potentially get a lower monthly payment. This can especially be the case if your payoff loan balance is lower than your initial auto loan balance.
- You can end up underwater with your loan. If you borrow more than your car is worth, you get something right away negative equity in the vehicle. If the car is totaled or you are trying to sell it, you will have to pay the balance out of your own pocket. Even if you don’t exceed the value of your car on your loan, the vehicle could depreciate faster than you pay it back, which can still leave you underwater.
- You might end up paying more. If you don’t get a lower interest rate, the new loan could be expensive – both in terms of a higher monthly payment and the additional interest you have to pay. Even if you can secure a lower interest rate and monthly payment, you’re typically extending your repayment period when you refinance. That means you could end up paying more interest overall. “Don’t use your car as an ATM with higher fees for an extended period of time,” says Steven Gordon, senior director of finance at Way.com, an auto services app.
- You could risk a withdrawal. Depending on the terms of your current and new car loan, you could end up with a higher monthly rate. If you cannot afford this payment, you could default and risk having the vehicle impounded.
When to Consider a Payout Auto Refinance
Refinancing your car loan to get cash from equity may be a good option for some, but not all. Here are some situations where it might be useful:
- You don’t plan on renting more than your car is worth.
- Your credit is in good shape and you can get a comparable or even lower interest rate.
- You can easily afford the new monthly rate.
- You need some money for a good cause and want to minimize your interest costs.
- You don’t own a home or you want to avoid the high closing costs of a mortgage refinance with payout or a home equity loan.
“A refinancing loan with a payoff can be a good idea if you know you have financial control and can take on the extra debt,” says Lyle Solomon, principal attorney at Oak View Law Group, a debt relief firm. “It’s important to review your spending habits before considering taking out a refinance loan with a payout.”
However, if you do decide to opt for a payout refinance, try not to extend your repayment period too much. “Extending the refinance loan for 84 months just to get a lower payment when you have less than two years left on your current loan unless it’s the only way to keep the car isn’t a smart move” , says Gordon.
Alternatives to a payout car loan
If you’re considering using an auto refinance to access a portion of your equity, it’s important to consider all of your options before proceeding. Depending on your cash needs, here are some possible options:
- Cash-out mortgage refinancing. If you need to borrow more than a payout auto refinance allows, you can do it with your home instead. This can be especially helpful when mortgage rates are low and you have a significant amount of equity in your property.
- Home equity loan or line of credit. get one Home equity loan or a home equity line of credit may be worth considering if you need more money but don’t want to refinance your main mortgage. A HELOC can be particularly beneficial if you want ongoing access to credit instead of a one-time loan.
- private loan. If you want to avoid the risk of losing your car, consider one unsecured personal loan. Interest rates can be higher, but if you have great credit, you might still be able to earn single digits.
- Credit card with 0% APR. If you have good credit, you may be able to get a credit card with an approval introductory 0% APR on purchases, balance transfers, or both. Just make sure you can withdraw your balance before the end of the promotional period to avoid high interest rates. Also remember that you don’t know what your credit limit will be until you are approved. Your card limit may not be high enough to cover the purchase you want to make.
Take the time to review all of your options and choose the one that best suits your needs and can help you save the most in the long run.