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Can You Cash Out Auto Refinance?

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Lauren Ward

Lauren Ward

Updated July 28, 2021
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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.
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 both the auto loan and the cash, 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.

Can You Cash Out Refinance a Car?

Yes, you can, 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 does not necessarily mean that it offers cash out refinance auto loans. Only some do. Lenders that do offer cash out auto refinances  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 loan lenders may be willing to refinance your loan and provide you with an additional loan as long as your equity in your car can cover both.. Once you’re approved for a cash out auto loan, you’ll receive the extra cash. Then you’ll start repaying the loan with your new payment amount each month. 

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 Does Cash Out Refinancing Work?

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. 

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.

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.

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

The primary benefit is that you can potentially borrow money at a lower cost with an auto loan compared to a high-interest personal loan or credit card. And you may be able to reduce the interest rate you’re paying on your current auto loan. A con would be that you could pay more interest over the life of the loan if you spread out the payments over a longer period of time. Additionally, you’ll use your car as collateral for the cash out funds, which does put you at risk of losing your car if you can’t repay the higher loan amount.

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.

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 car. It’s unlikely that you’ll be able to accrue enough equity to get a cash out refinance on your vehicle very frequently.

Are There Reasons Why Cash Out Refinancing Is Bad?

There are a few possible downsides involved. The first is that you can potentially end up underwater on your 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. And if you can’t afford the new larger loan payment, your car could be repossessed. 

The Takeaway

An auto refinance with cash back 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 loan refinancing rates? Find your best offer from Lantern by SoFi’s lending providers when you fill out one simple form.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)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. SOLC0521086

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?

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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