Cash-Out Auto Refinance: Turning Car Equity Into a Loan

How cash-out refinancing works

Equity is the gap between what the car would sell for and what you still owe on it. If the car is worth $20,000 and your payoff is $12,000, you have $8,000 of equity. A cash-out refinance lets you borrow part of that gap. The new lender pays the old one, records itself as the lienholder on your title, and sends the rest to you.

Lenders do not lend against the full value. Each sets its own limit as a share of the car's value, and it may use a pricing guide rather than what you think the car is worth. Older cars, high mileage and weaker credit usually mean a lower limit or a higher rate.

1. 1 Get a payoff quote from your current lender, good through a specific date.
2. 2 Estimate the car's value honestly, using its mileage and condition, and subtract the payoff.
3. 3 Ask lenders how much they will lend against that value and at what APR, for the same term.
4. 4 Compare the total cost of the cash with other ways to borrow the same amount.

What lenders look at

A cash-out application is reviewed much like a purchase loan, with one extra question: is there enough value in the car to cover the larger balance? Expect the lender to check the following.

• Your credit report and score, which set the rate tier and whether cash-out is offered at all.
• Income and existing debts, to judge whether the higher payment fits your budget.
• The car's year, mileage and condition, often with the VIN and an odometer reading or photos.
• Your current loan's payment history, since recent late payments can rule out cash-out.
• Proof of insurance naming the new lender, usually with comprehensive and collision coverage.

Keep paying your current loan until you have written confirmation that it was paid off.

What the cash really costs

The cash is not a separate loan with its own price: it is mixed into one balance with your car debt, at one rate, for one term. That makes the cost easy to miss. Compare the payment and interest with and without the extra amount.

If the lender also charges a fee, or if you accept a longer term to keep the payment flat, the cost of the cash goes up. Stretching the term is the most common way a cash-out deal becomes expensive, because you keep paying interest on the cash for years after it is spent. You can test your numbers in the auto refinance calculator.

Risks to weigh before you sign

• Owing more than the car is worth: cars lose value every month. A bigger loan means you can end up upside down sooner, which makes it hard to sell or trade the car without bringing cash.
• Your transportation is the collateral: if you fall behind, the lender can repossess the car under your contract and state law, and you may still owe a balance after it is sold.
• GAP coverage: if the car is totaled, insurance pays its value, not your loan. A larger loan widens that gap.
• Add-ons: a refinance contract can include service contracts or GAP products you did not ask for. They are optional; ask for them to be removed.

Read our pages on repossession and on an upside-down car loan before you borrow against the car you need every day.

When it can make sense

A cash-out refinance tends to fit when two things are true at once. First, the new APR is lower than your current car loan rate, so the refinance saves money on its own. Second, the cash replaces something more expensive, such as a credit card balance at a much higher rate, and you will not run that balance back up.

It fits poorly when the cash would pay for everyday spending, when your income is uncertain, or when the only way to afford the payment is a longer term. If you mainly want a lower payment on the loan you have, a plain auto refinance is the simpler tool.

Other ways to raise the same cash

Questions people ask