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What Is Cash-Back Auto Refinancing?

What Is Cash-Back Auto Refinancing?
Austin Kilham
Austin KilhamUpdated December 23, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When you refinance your auto loan, you replace your old loan with a new one, hopefully with a better interest rate or more favorable terms. If you have equity built up in your vehicle, you could take out a cash-back, or cash-out, refinancing loan and receive a lump sum of money as well. This type of auto loan isn’t right for everyone, however. Here’s a look at how a cash-back auto refinance works, and when you might want to use it. 

How Does Cash-Back Auto Refinancing Work?

Typically, when you refinance your car, you have one of two goals in mind: a lower interest rate or a lower monthly payment. When you refinance your loan, you take out a new loan to pay off your old one, and if interest rates have dropped or your financial situation has improved, you may qualify for a new loan with a lower rate. If you wish to lower your monthly payments, you can extend your loan term. Though be aware that you’ll be making interest payments for longer, which can increase the ultimate cost of the loan.A cash-back auto refinance, also referred to as cash-out auto refinancing, allows you to accomplish both of these goals. Additionally, if you have equity built up in your vehicle, you can convert that equity into cash. You do so by borrowing more than you owe and then receiving the difference in cash. In other words, your new loan will be larger than your previous loan, rather than the one-to-one replacement you’d get with a traditional refinancing loan.Often, lenders will only offer cash equal to a certain percentage of the equity you’ve built in a car. For example, if you have $10,000 in equity, and your lender will offer you 80% cash back, then you’ll receive $8,000 in cash. How much you can borrow may be impacted by other factors as well, such as your credit history.

What Is Equity on a Car Loan?

You can only take out a cash-out loan if you have equity in your vehicle. To get an idea of how much equity you’ve built, ask your lender for a 10-day payoff, which includes your loan balance and 10 days’ worth of interest charges.Next, find out the value of your car through online resources, such as Kelley Blue Book or Edmund’s. These sites allow you to enter the make, model, and mileage for your vehicle and receive a quick estimate of how much it’s worth based on data gathered on used car sales across the country.Now, compare the two numbers. If you owe less than what your car is worth, you have equity built in the vehicle. In this case, you may be able to find a lender willing to offer you a cash-back loan. On the other hand, if you owe more than your car is worth, you have negative equity. This situation is also known as being upside down on an auto loan. At this point, you’re unlikely to find a cash-back loan. That said, it’s possible that as you keep paying off your loan, the value of your car will eventually exceed your loan balance, and you can consider cash-back options.Recommended: How Car Loans Work

Benefits of Cash-Back Refinancing

As mentioned above, there are three potential benefits to cash-back refinancing. Let’s dive deeper into those upsides: 
  • Lower interest payments: One major upside of refinancing is the potential to lower. Say you have $30,000 left on your auto loan, your current interest rate is 7%, and your loan term is 60 months. By refinancing with a new loan with the same term and 4% interest, your monthly payments would drop from $594.03 to $552.49. You’d save $2,492.42 in interest payments over the life of the loan.
  • A more manageable monthly bill: Refinancing can also allow you to make your monthly payments cheaper. To do so, you might extend the loan term. Consider the above example, only this time, you decide to extend the term to 72 months. By doing so, your monthly payment would drop from $594.03 to $469.35. That said, because you’re paying interest for longer, your interest rate savings is only $1,848.56. While your interest rate savings in this case may be $643.86 less, if a longer term and a lower monthly payment helps you pay off your bills on time — a key factor in building a good credit score — then the smaller interest rate savings may be well worth it.
  • Access to a lump sum of cash: As the name suggests, cash-back auto loan refinancing gives you access to cash, which is always useful. But you may want to consider accessing money from a cash-back refinance only in the case of emergencies, or if you can consolidate debt that has a higher interest rate than your refinanced loan. For example, if you use $5,000 from a cash-back loan with an interest rate of 7% to pay down $5,000 in credit card debt with a 14% interest rate, you can ultimately end up saving yourself money.

Risks of Cash-Back Refinancing

There are certainly risks to cash-back refinancing to consider as well. Specifically, this includes: 
  • Taking on additional debt: Cash-back refinancing means that you are taking on more debt than you already had. That puts you at greater risk if you’re struggling in your financial situation. As a result, cash-back refinance may be something you consider as a last resort. 
  • Increasing your chance of going upside down: What’s more, because cash-back refinancing can lead to a bigger loan, it can increase the chances that you’ll go underwater as your car’s value drops. Going underwater can limit some of the options available to you. For example, you’re unlikely to be able to refinance again or trade in your vehicle toward the purchase of a new car. Also, if you sell your car, it’s unlikely you’ll garner enough from the sale to cover the amount you still owe on your loan; you’ll be on the hook for the difference.  

Finding a Cash-Back Auto Loan Lender

Not all lenders will offer a cash-back refinance loan. Explore options from banks, credit unions, and private lenders. Be sure to shop at multiple lenders to help ensure you’re able to find the lowest interest rate and best terms possible. 

Applying for a Cash-Back Auto Loan

When you find a loan that suits your needs, you’ll likely have to meet a number of requirements before you apply. Lenders will typically look at the following factors:
  • Credit score: Your lender will likely have a minimum credit score requirement. Typically, borrowers with the highest scores will qualify for loans with the lowest interest rates. A FICO score of 700 or above will usually qualify you for the best rates and terms. Lenders may worry borrowers with lower scores are at greater risk for a loan default.
  • Payment history: Your lender will look into your history with your existing loan. They’ll want to be sure you have a history of making on-time payments. 
  • Proof of income or employment: Your lender may also want to see proof of income or steady employment to be sure that you’re set up financially to make future payments. 
Be aware that applying for a loan will trigger a hard inquiry into your credit history, which can temporarily lower your score. However, applying to more than one loan in a short period of time does not have a cumulative negative effect, so you are not penalized for shopping around for the best loan. 

The Takeaway

You can refinance your car and get cash back. Cash-back refinance loans are available if you’ve built some equity in your car. However, you’ll want to carefully consider why you need the money and if there are other ways that are less risky than taking on a bigger debt. If you decide a cash-back loan is right for you, be sure to shop around for the best option for an auto refinance with cash back for your situation. 

3 Car Loan Refi Tips

  1. Refinancing your auto loan could lead to lower monthly car payments and more money in your budget. Lantern by SoFi can help you find the right car loan refinancing rate for you.
  2. Shortening the term of your auto loan may increase your monthly payments, but you’ll likely pay less in interest over the life of the loan.
  3. You may have trouble refinancing the loan on a car that is worth less than what you owe. For more info, check out When Is the Right Time to Refinance a Car?

Frequently Asked Questions

Can I refinance my car and get cash back?
Can you use cash back as a down payment?
Which is better: 0% APR or cash back?
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Photo credit: iStock/sierrarat

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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