Cash-Out Auto Refinancing: All You Need To Know
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Buying and owning a car can be a thrill. Whether it's washing and waxing it until it has the perfect shine, setting out for a country drive at sunset, or simply getting from point A to B Monday through Friday, the perks of having a vehicle at your beck and call are seemingly limitless.
But along with vehicle ownership comes several financial responsibilities, like making your monthly payments, paying local taxes and fees, and purchasing auto insurance.
That's in addition to other expenses like your mortgage or rent, food, and utilities, to name a few.
But what if these expenses become too much to handle and you find yourself looking for a way to obtain additional funds? Or maybe need money for home improvements or funding to pay off a personal loan.
If you own your vehicle or hold a good amount of equity in it, cash-out auto refinancing can be a viable option to help you get back on track financially.
But what is a cash-out refinance? How does a cash-out refinance work? Read on as we discuss all ins and outs of cash-out auto refinancing.
Car financing basics
As of 2021, with the average new car costing over $45,000 and used vehicles at a median price of around $25,000, buying a car is a significant financial decision.
Because of this, most car buyers opt to take out an auto loan and pay for their vehicle gradually over time. Although it sounds simple, several loan options exist.
Typically, borrowers first make a down payment on a car loan, reducing the total loan amount they finance, also known as the principal. Not only does a larger down payment, in turn, lower your monthly payments, you'll also be responsible for fewer interest charges during the life of the loan.
Another critical aspect of a car loan is the interest rate. The interest rate is a percentage of the loan principal that you pay during your loan. Interest charges allow a lender to make money on loan transactions rather than nothing at all on a simple dollar-for-dollar repayment. Low rates mean less total cost to you over the life of the loan.
While the interest rate on a car loan plays an important role, the annual percentage rate, or APR, paints a clearer picture of your total yearly costs. The APR considers the interest rate and additional lender charges, like the origination fee, giving you a complete idea of your annual obligations.
The term length of your auto loan is a significant factor in determining what you pay monthly. Loans usually last 36 months, 72 months, or 84 months, and in general, the longer the loan term is, the lower your monthly payments are. A longer-term loan can help you get behind the wheel of something more expensive if you're stretching your budget.
The total cost of a car loan refers to the eventual sum you're responsible for when factoring together the down payment, principal, APR, and term length.
When you buy a used car, securing the proper financing can be a hassle. Not only do you have to locate the make and model you want, but performing additional research on loans takes up valuable time. But Shift makes buying and financing a quality used car easy. Shift's certified mechanics perform extensive 150-point inspections on every car and have complete vehicle history reports, so you know your used car feels as good as new. And Shift works with a network of trusted lenders who compete for your business, so you get the best deal on financing.
How does a cash-out refinance work?
If you've been paying off a car loan for a while and built up a solid amount of equity, a cash-out refi can give your bank account a boost.
Whether you encounter an unexpected financial situation or want extra money to spend, cash-out refinancing is a type of loan that provides you with additional funds.
When you "cash out" your existing loan, you supplant it with a new loan, also receiving additional cash in the process. How much money you obtain depends on the amount of equity you own on your vehicle. Your credit score can also play a role in determining the terms of a cash-out refi.
Cash-out auto refinancing offers several benefits, like the potential for lower rates, lower monthly payments with an extended loan term, and obtaining needed funds to meet your obligations.
However, a cash-out refinance of your current loan has a few catches, too.
If you opt for cash-out refinancing, the possibility exists of becoming upside-down on your car loan or owing more than your vehicle's worth when considering the loan to value ratio. Also known as negative equity, being upside down on your car loan can put you in a difficult financial situation.
You may not qualify for a lower interest rate when you cash-out refinance or even be subject to higher ones, further raising your expenses.
And should you be in a troubling financial situation, a cash-out refinance could raise your monthly payments or lengthen your loan term, subjecting your vehicle to repossession if you can't meet your obligations.
If you decide a cash-out refinance isn't the right tool to meet your financial goals, you still have other options like standard auto loan refinancing or consolidating your credit card debt.
Some borrowers choose to refinance loans rather than take on the additional debt of a cash-out refinance.
Is a cash-out refinance a good idea?
With the many pluses and minuses of cash-out refinancing your car loan, whether or not it's right for you depends on your situation.
While cash-out auto refinancing can secure you both better loan terms and extra cash, the possibility also exists of a higher interest rate or becoming upside down on your loan.
If you own a substantial amount of equity in your vehicle, a cash-out auto refinance could provide you with a lump sum of cash to take care of your financial needs. Conversely, if you don't have much equity in your vehicle, the money provided by a cash-out refinance might not be enough to help.
When you're looking to buy a quality used car and need to finance, look to Shift. Applying for financing with Shift is easy, with no cost or obligation to you. Most applicants receive an offer within minutes. Financing with Shift is so convenient that nine out of 10 buyers choose us for their auto loan needs. We partner with excellent lenders that offer competitive rates, or in many cases, Shift can work with a lender of your choice.
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April 15, 2022
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