What You Need to Know (2022)
Cash-out auto refinance allows you to pay off your existing auto loan and withdraw some of your vehicle’s equity in cash. You’ll owe more debt overall, but it can be a good decision if you can get a much better interest rate and keep the repayment term relatively short.
We at the Home Media test team compared that Best Auto Refinance Rates, and we recommend considering cash-out refinancing along with traditional refinancing options. We will cover the pros and cons of automatic refinancing with withdrawal here.
What is Cash Out Auto Refinance?
Automatic payout refinance allows you to take cash out of your vehicle’s equity and use it for whatever you want. It’s kind of Refinance car loan, which means you take out a new loan to pay off your old one. What is unique about cash out refinancing is that the new loan is greater than what you owe on your vehicle and you receive the difference in cash.
Traditional vs automatic payout refinancing
With traditional refinancing, you only have to pay back what you have left over from your current car loan, ideally at a lower interest rate. The main benefits of auto refinancing are interest savings and a lower monthly payment.
Automatic payout refinancing makes it much harder to both save money and get a lower payment. This is because you are increasing the debt owed. You need to secure a much better interest rate or make higher monthly payments to save on interest compared to your existing car loan.
Pros and cons of automatic refinancing with payout
Automatic payout refinancing may or may not be a good idea depending on your financial situation. Here are the basic pros and cons of a withdrawal refi:
How Much Cash Can You Get?
With payout auto refinance, you can usually withdraw an amount up to the equity of your vehicle. You can find out how much equity you have in your vehicle by deducting the remaining debt from the value of the vehicle. Some lenders finance up to 80% of the vehicle value, others up to 100%. Some even let you borrow more than 100%.
Cash out auto refi example
Let’s say your car is worth $20,000 and you have $12,000 left on your loan. That means you have $8,000 equity in your vehicle. If you withdraw the full $8,000 in cash, you owe $20,000 on the new payout auto refinance loan. If the lender would only finance up to 80% of your car’s value, you would get a maximum of $4,000 in cash instead.
While most financial institutions won’t give you a loan greater than the value of your car, you can still risk being screwed if you extend your repayment period too long. Your credit would automatically be turned upside down if you borrowed more than the value of your car (we recommend avoiding this).
Check the value of your car
Use tools like Kelley Blue Book or the National Automobile Dealers Association to check your car’s value. You can enter your car’s Vehicle Identification Number (VIN) to see an accurate estimate based on mileage and condition. This will give you an idea of what type of loan approval you can expect for the value of your car.
Lenders will check the value of your car using yellow pages or request an in-person inspection of your vehicle.
Is Cash Out Auto Refinance a Good Idea?
Automatic payout refinancing is only a good idea if you can get a better interest rate and keep the repayment term relatively short. This will likely mean your monthly payments stay about the same or increase. You end up piling on even more debt. For this reason, withdrawal refinancing is not a smart way to simply get extra spending money.
Get a better interest rate
If you can’t get a better APR on a payout auto refinance loan, we don’t recommend taking out a new loan. If you increase your debt at the same interest rate, you have to pay more interest, and refinancing is not a long-term solution to cash flow problems.
Keep the loan term short
Paying less interest overall and receiving lower monthly loan payments is difficult with automatic payout refinancing. By extending the loan term, you can get a lower monthly payment, but you end up paying more for the vehicle.
To save the most money over the life of the loan, consider increasing your payment amount to pay off the debt as quickly as possible. However, make sure you can afford the monthly payments. If you default on this type of loan, you risk losing your car.
Can You Consolidate Debt With a Cash Out Auto Refi?
It is possible to use a cash out refinance loan for debt consolidation. This only works if you can get a loan with a better interest rate than your other debt. For example, if you have a credit card with a balance of $3,000 and an interest rate of 15%, it might be a good idea to pay it off with a payout refinance loan at a 7% interest rate.
The risk is owing more than your car is worth. With a personal loan or debt consolidation loan, default is the only event that would trigger full repayment. But if your car is used as collateral, in the event of a total loss, the insurance company will have to pay the value of the car and you will have to pay the rest.
Alternatives to automatic refinancing with payout
If you decide that an auto refinance with payout isn’t right for you, there are other ways to pay off your car loan.
Traditional Refinance Loans
If interest rates are better now than they were when you bought your car, a traditional auto refinance loan might be the way to go. It could lower your payments, which would provide additional cash flow each month. Traditional automatic refinancing could also reduce the total amount of interest you have to pay.
Personal loans typically have higher interest rates than car loans because they are not backed by collateral. But borrowing $2,000 and repaying it in the short term might be better than adding $2,000 to auto loan debt that’s collateralized by a depreciating vehicle.
The final result
Consider paying out refinance carefully, as you could end up owing more than your car is worth. We only recommend getting an auto refinance loan with disbursement if you:
- Get a significantly better interest rate
- Avoid extending the loan term
- Make larger payments to save on interest costs
Always check the details of your current loan to see if there is a prepayment penalty. In this case, you will be charged a fee for prepaying your existing loan.
Our recommendations for refinancing car loans
Decide when to refinance a car – whether with a traditional refinance loan or a cash-out refinance loan – depends largely on the interest rates available to you at any given time. Compare reputable companies like Auto Approve and myAutoloan to find them best car loan rates.
Automatic approval: top choice for refinancing
Auto Approve specializes in refinancing auto loans for cars, trucks, SUVs, RVs, boats and ATVs. Refinance rates start at 2.25% for borrowers with the best credit ratings. The company has one Rating A+ and accreditation from the Better Business Bureau, along with an average rating of 4.4 stars out of 5.0 from customer reviews on the organization’s website.
Find out more in our Approve review automatically.
MyAutoloan: Best Low Rate Option
The myAutoloan financing marketplace connects borrowers to a network of lenders that includes credit unions, banks and dealers. You can see up to four credit offers with a single prequalification application. The company offers auto refinance rates as low as 1.99% for borrowers with good credit histories.
Find out more in our myAutoloan review.
Because consumers rely on us to provide objective and accurate information, we have developed a comprehensive rating system to formulate our ranking of the best car loan companies. We collected data on dozens of loan originators to rank the companies based on a variety of ranking factors. The end result was an overall rating for each vendor, with the companies with the most points topping the list.
Here are the factors our reviews take into account:
- Reputation (30% of total score): Our research team considered industry expert reviews and each lender’s fiscal year to generate this score.
- Availability (20% of total score): Companies that cover a variety of life circumstances are more likely to meet borrowers’ needs.
- Loan details (15% of total score): We considered the types of loans, terms, and loan amounts available from each lender to determine this score.
- Prizes (25% of total points): Auto loan providers with low APRs scored the highest in this category. Available discounts have also been taken into account.
- Customer Experience (10% of total score): This score is based on customer satisfaction ratings and transparency. We also considered the responsiveness and helpfulness of each lender’s customer service team.
*Data correct at time of publication.