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What Is Cash-out Auto Refinancing?

Can You Cash Out Auto Refinance?; A cash out refinance of your auto loan can help you get a lower interest rate or better terms on your auto loan. Let Lantern by SoFi explain how this works.
Lauren Ward
Lauren WardUpdated January 23, 2023
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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.
Getting a cash out auto refinance can be a way to borrow money by using the equity you have in your vehicle. Potentially, you could also get a lower interest rate on your auto loan, as well.Basically, in a cash out auto refinance, you are refinancing your current auto loan, but also getting a cash loan as part of the deal. Once the deal is sealed and you’ve gotten the cash out part of the loan, you will start making regular payments to pay back the refinanced loan with interest.Like any type of financing, cash out auto refinancing does come with its own particular pros and cons. Yes, you may spend less on interest for your cash loan than you would for a credit card advance. But you are putting your vehicle at risk since it will be used to secure the loan.

What Is a Cash Out Refinance?

A cash-out refinance is when a borrower taps into an asset’s available equity by replacing an existing loan product with a collateralized loan. The cash-out refinance loan provides borrowers with funding by pledging the asset as collateral and borrowing against its value.A borrower, for example, could replace a mortgage loan or auto loan with a cash-out refinancing loan greater than the payoff amount of the loan being refinanced. Cash-out refinancing can allow these homeowners or car owners to trade equity for cash, and borrowers may have few or no restrictions on how to use the funds.Replacing the account balance of an existing loan with a larger-sized loan increases your burden of debt. The risk of taking out a cash-out refinance is lenders may seize your collateral if you fail to make required repayments.

Can You Cash Out Refinance a Car?

Yes, you can cash-out refinance a car, given the right circumstances. What are those?For one, you must own a reasonably new vehicle and have a fair amount of equity in it.Also, your lender (either your current auto loan lender or a new one) must be willing to offer a cash-out refinance.These two elements are interrelated. To expand on them, a cash-out auto refinance is a type of loan that’s secured by your vehicle. The vehicle acts as collateral, so typically you must own a good percentage of it so that the cash-out loan is not too risky for your lender.However, just because a lender offers standard refinancing doesn’t necessarily mean that it offers cash out refinance auto loans. Only some do.Lenders that do offer cash out refinance auto loan funding may vary on how much cash you can borrow against your vehicle equity. Some may allow you to borrow up to 100% of the value of your car, while others may set a lower limit.

How Does a Cash Out Refinance Work?

Cash out auto loans typically start with an application just like you’d find with any other type of loan.Generally, the lender performs a credit check to help it determine what interest rate to offer you. Your income and other debts are also evaluated to make sure you can afford the new loan payment. Your total debt payments each month typically should be no more than 45% to 50% of your monthly income, although the exact percentage may vary by lender.With an auto refinance cash out, however, the lender also looks at the value of your car. You may need to take your vehicle to be physically inspected in order to determine how much money you could potentially borrow. Your equity in the car is equal to the car’s value minus the balance of your auto loan.Cash out car refinance lenders may be willing to refinance your loan and provide you with additional funds if your equity in your car is sufficient to cover the transaction.Once you’re approved for a cash out refinance, you receive the cash out funds from your lender. It could be in a check or through direct deposit. Then you will start repaying the loan based on your loan agreement.

Which Kinds of Lenders Offer Cash Out Refinancing?

The following financial institutions and entities may offer cash-out refinancing:
  • Banks
  • Credit unions
  • Private lenders

Does a Cash Out Refinance Affect Your Interest Rate?

You will most likely see completely new loan terms when you apply for auto loan refinancing with a cash out component.There are many factors that can impact your new interest rate — and loan amount is one of them. But if your credit score has improved since you took out your original auto loan, your rate could be lower. However, there’s no single factor that defines your rate, even with a cash out refinance.

When Can You Cash Out Refinance a Car?

You might be able to cash-out refinance your car if you’re in the right situation. A cash out refinance lets you tap into your auto equity and get a lump sum of cash in return for a larger loan balance. This could make sense for you if your credit score has improved since you took out your original loan and you can comfortably afford the new monthly payments. You also typically need to have a relatively newer vehicle in order to qualify, usually under 10 years old. Lenders typically look at the car’s current value and mileage as part of the loan application.

How Often Can You Cash Out Refinance?

Technically, there’s no limit to how often you can refinance an auto loan. The main consideration is how much equity you have in the asset. It’s unlikely that you’ll be able to accrue enough equity to get a cash-out refinance on your vehicle very frequently.

How Soon Can I Cash Out Refinance?

There’s no time limit on when you can do a cash out auto refinance. The most important factor is how much equity you have in your car. As soon as you’ve made enough payments to earn some equity, you could apply to refinance. Alternatively, maybe you made a sizable down payment (giving you automatic equity) but your financial situation has changed since taking out the loan. Look at your loan balance compared to the vehicle’s current market value to find out if enough time has passed for a cash out refinance.

Does a Cash Out Refinance Affect Your Credit Score?

Yes, potentially your credit score could be impacted in a few ways by a cash out refinance. First, you’ll likely see a small dip because of the hard inquiry performed on your credit report as part of the application process. You may also see a dip in your score since your level of debt will rise — a larger loan means greater credit utilization and amounts owed. The exception would be if you use the cash out funds to pay off high interest revolving debt, like a credit card. Then you might actually see an improvement in your score since an installment loan is viewed more favorably.

What Credit Score Is Needed for a Cash Out Refinance?

Different lenders require different credit scores. But cash out refinance loans are typically reserved for borrowers with better credit. That’s because you’re asking for a higher loan amount, so the lender wants to feel confident that you’ll repay the new balance in full.

How Long Does a Cash Out Refinance Take?

A cash out car refinance usually isn’t instantaneous. That’s because you’ll likely need to get your vehicle inspected to confirm its value.

What Are the Pros and Cons of a Cash Out Refinance?

There are a number of pros and cons associated with a cash-out refinance. We highlight some of them below:

Pros of Cash Out Refinancing

Consider the following cash-out refinancing pros:
  • You can potentially borrow money at a lower cost than a high-interest personal loan or credit card
  • You may be able to secure a lower interest rate than your existing loan rate
  • You can take advantage of your available equity in a valuable asset

Cons of Cash Out Refinancing

Consider the following cash-out refinancing cons:
  • You could pay more interest over the life of the loan if you spread out the payments over a longer period of time 
  • You’ll use your asset as collateral for the cash-out funds, which puts you at risk of losing your asset if you fail to repay the new loan
  • It may replace your existing debt burden with a larger burden of debt
You can weigh the pros and cons when deciding whether cash-out refinancing is right for you. Trading equity for cash can provide you with general purpose funding, but the transaction is not risk-free. One of the risks of cash-out auto refinancing is you can potentially end up underwater on your refi auto loan, meaning your balance would be higher than the value of your car, especially if your vehicle depreciates quickly. If your car gets totaled, you’ll still owe the remaining loan balance on the cash-out refinance. And if you can’t afford the new larger loan payment, your car could be repossessed.The best cash-out auto refinance loan for you may be an affordable loan that helps you meet your goals.

Is a Cash Out Refinance Taxable?

No, you don’t have to report the money from a cash out refinance as taxable income because it’s actually a loan. You have to repay the balance, along with interest. So even though it feels like you’re getting a lump sum payment, you’re still paying to borrow the money.

Are There Closing Costs on a Cash Out Refinance?

There aren’t substantial costs with most auto loan refinances, even when cashing out equity. You may have to pay a title transfer fee, which varies by state. Some lenders may charge an origination fee, which could be 1% to 2% of the loan amount. Check your refinancing offer for a breakdown of additional costs.

Alternatives to Cash Out Refinancing

Here are some alternatives to cash-out refinancing:

Normal Refinancing

Consumers with an auto loan could always consider normal refinancing, which may provide borrowers with a lower monthly payment without trading equity for cash. Among the pros and cons of auto loan refinancing is it may provide you with a lower interest rate (pro) while temporarily causing your credit score to drop from a hard pull inquiry (con).Refinancing for a lower monthly payment in some cases may extend your term, and extending your term can saddle you with more interest charges over the life of your loan. A car refinancing calculator can help you see whether a refinanced loan offer may increase or decrease your total interest costs.The auto loan refinancing cost may include a number of fees, such as early termination fees for paying your current lender off early with a refinanced loan.Comparing your options and paying attention to the details are among the auto loan refinancing tips you could consider as a consumer.Borrowers are expected to provide proof of identity and proof of income when applying for auto loan refinancing, among other auto loan requirements.Consumers may ask, “What happens to car loans when someone dies?” The answer is that car loans do not simply disappear when a borrower dies. A surviving spouse may be responsible for paying the debt, or a lender may move to repossess the vehicle.

Consolidate Your Debt

Consumers with existing loans and revolving credit accounts can apply for a debt consolidation loan. This could simplify your debt burden and may allow you to save on interest costs.

Auto Equity Loans

Car owners who have no outstanding auto loan debt and 100% equity in their cars can apply for auto equity loans. An auto equity loan is a secured lending product that allows you to borrow against the available equity in your car. Borrowers may use auto equity loans for almost any purpose, including vacations and unplanned expenses. Lenders may seize your vehicle if you default and fail to make required repayments on your auto equity loan.

Unsecured Loans

Consumers can apply for unsecured loans without pledging any assets as collateral. Borrowers may need good credit to qualify for unsecured loans. An unsecured consumer loan can provide you with a lump sum of borrowed money or a line of credit. Failure to repay an unsecured loan can damage your credit and cause lenders to sue you for breach of contract.

Auto Loan Refinancing Rates

An auto refinance cash out can be less expensive than other loan options. But you’ll need both equity in your vehicle and the confidence that you can comfortably afford your new payments in order to make it work.Ready to compare auto refinance rates? Find your best offer from Lantern by SoFi’s lending network when you fill out one simple form.

Frequently Asked Questions

Can you cash out refinance a car?
How does cash out refinancing work?
Does a cash out refinance affect your credit score?
What credit score is needed for a cash out refinance?
How long does a cash out refinance take?
How soon can I cash out refinance?
What are the pros and cons of a cash out refinance?
Is a cash out refinance taxable?
Are there closing costs on a cash out refinance?
How often can you cash out refinance?
Are there reasons why cash out refinancing is bad?
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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