If you want a lower interest rate or better terms on your auto loan — along with some cash in hand — a cash-out refinance of your auto loan could be an option.
Cash-out refinancing means that you refinance for more than what you currently owe on your car. The amount you can borrow is based, in part, on the equity you have in the vehicle. If you’re approved for a cash-out refinance, it can allow you to
get new loan terms and some money in your pocket for other expenses, to pay off other debit, home improvement or an emergency.
Let’s look at how cash-out refinancing of an auto loan works compared to traditional refinancing, as well as some things to consider before you decide to go this route.
With a traditional refinance, you take out a new loan to pay off your current loan. If your credit scores have improved or interest rates have dropped
in the time since you got your original loan, you might be able to get a lower interest rate on a new loan, which could help you save money. You may also be able to save on your monthly payment if you extend your loan term. Just keep in mind that
you’ll likely end up paying more in interest if you choose a longer loan term.
Cash-out refinancing involves applying for a new car loan to cover the remaining balance on your original loan, plus an extra amount. At WKFCU how much you can apply for depends on how much equity you have in the car and your credit score. And if
you’re approved, the funds may be released in a lump sum.
Let’s say you’re approved for a cash-out refinance loan for $13,000 to cover your original auto loan of $10,000, plus borrow another $3,000 from the equity you have in the car. You’ll get $3,000 cash in hand and be responsible for paying
down the $13,000 cash-out refinance loan with monthly payments and interest.
You could use this extra money for debt consolidation — paying down other high-interest debt, such as a balance on a credit card or loan — but this is a good idea only if the interest rate on your refinance loan is lower than your current
loan. You could also use the cash to handle a financial emergency or even home improvement.
The amount of extra cash you can borrow depends on several factors.
While a cash-out refinance loan may seem like an easy way to refinance your auto loan and borrow some cash, it could come with some drawbacks.
If you aren’t able to get a better interest rate than you had on your original loan, refinancing probably isn’t a good option. That’s because you’ll likely increase the amount of interest you pay over the life of the loan. But
even if you’re offered an interest rate that’s slightly lower, the terms of the new loan may lead to a higher monthly payment. You’ll have to decide what works for your monthly budget.
Here’s an example. Let’s say you took out a $20,000 auto loan with an 8% interest rate and 60-month term. Your monthly payment would be $406.
Then, a couple of years into your loan, you decide to get a cash-out refinance loan. When you refinance the roughly $13,000 remaining on the loan, plus $4,000 in cash — with a 48-month loan term and an interest rate of 7.5% — your monthly
payment would be $411.
When you owe more on your auto loan than your car is worth, you’re considered upside down on your loan. With cash-out refinancing, your risk of becoming upside
down could increase, depending on how much you borrow against your car’s equity. This is because your car continues to depreciate, or lose
value, over time.
Making extra payments or paying off your cash-out refinance loan early could help you avoid becoming upside down. But check to make sure your lender doesn’t charge a
prepayment penalty fee — otherwise, you’ll have to pay a fee if you pay off your loan early.
With a cash-out refinance, you take on more debt because you’re borrowing more than what you currently owe on your original auto loan. If you’re already struggling to make your car loan payments, increasing your debt could put you at greater
risk of defaulting on your new cash-out refinance loan and having your vehicle repossessed.
Cash-out refinancing could be a way to get better loan terms and some cash in hand.
Get prequalified to give yourself an idea of whether you might be approved and what the terms might be. If you decide that a cash-out refinance loan isn’t for you, consider whether a
personal loan might be a better option for getting some cash.
(Partially reprinted from creditkarma.com)
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