27 april 2022
When you refinance your car loan, it is to lower your monthly payment and potentially save money in the long run. But can you get extra money in your pocket by refinancing? Possible – if you have equity in your vehicle and are working with the right lender. Here's what we know about cash-out refinancing.
Getting money back from refinancing.When you do a cash-out refinance, you're still replacing the terms of the old loan with new ones, but you can also get cash back from the equity you had in the car. To get money back when you refinance, you must have done thisequity in your vehicle, and you must also qualify for refinancing.
When you firstfind a lender who can refinance your car loan, you sign the new loan contract and the lender sends the disbursem*nt check to your old lender. If you refinance a car with equity (you can also refinance a car with an actual cash value equal to the loan balance), you can choose to receive this equity in the form of a check. The size of the check is the difference between the actual cash value of your car and the down payment amount.
Is Cash Out Refinancing Worth It?If you withdraw the equity in cash, you will no longer have any equity in your vehicle and you risk being underwater on your loan again. Additionally, if you have to immediately trade the car in for another one, you won't have any equity to add to your next car loan. Keep in mind that you can't get any money back from a refinance if you don't have any equity in your vehicle. And if you only have a small amount of equity, it may not be worth taking the money.
Determine if your vehicle has excess value
Is there equity in your car?To find out if your vehicle may have equity, first contact your lender and request a 10-day down payment. The total amount includes the current loan balance plus 10 days of additional interest charges. Once you receive the deposit, you can get an estimate of your car's value by using online appraisal services such as Kelly Blue Book or NADAguides. These sites only provide a quick estimate of your vehicle's value, but they are a good starting point.
Compare the estimated values with the payout amount.If you owe less on the car loan than the car is worth, congratulations, because you may have equity and may be able to do a cash-out refinance if you find the right lender. This could be a good time to see what your vehicle is worth, as recent inventory shortages are causing used vehicle prices to rise. This means that a dealer may be willing to offer you more for your car/
But if you owe more on the vehicle than its current value,you are in a negative financial position, also known as being underwater on your car loan. You can't do a cash-out refinance or refinancing at all if you have negative equity.
You can solve this problem by continuing to make payments and waiting until the actual cash value of your car is greater than or equal to the loan balance.
Refinancing a car loan
Are you eligible for refinancing?If you have equity in your car, the next step is to find out if you qualify for refinancing. Each lender will vary in their requirements, but these are the typical refinancing requirements:
- Your car has driven less than 100,000 km
- Your car is less than 10 years old
- Your credit score is good or has improved since you started your loan
- Your loan is at least one year old
- With a good payment history you are up to date with payments
- Your loan amount is neither too high nor too low
If you, your vehicle, and your loan qualify for a refinance, you may be able to qualify for a refinance and get that equity in the form of cash.
Why refinance?Mostly borrowersrefinance their car loan to save money, monthly and/or during the entire loan period. If you financed your car at a higher interest rate than you would have liked, refinancing can be a good way to pay less overall while making a more manageable monthly payment. You can refinance in different ways:
- Extension of your loan term– When you extend the loan period, you can get more disposable income every month. However, it won't save you any money overall. In fact, a longer loan term with the same interest rate means that you pay more in total due to higher interest costs.
- Lower your interest rate- By lowering your interest rate, you save money throughout the loan period by lowering your monthly costs. This is the ideal way to refinance your car loan.
- Both extending your loan term and reducing your interest rate– Doing both may also help you reduce overall interest costs, depending on how long you extend the loan.
If refinancing isn't for you.If you decide to pay off the equity in the vehicle, do so wisely. Many borrowers use home equity to help with future car purchases because it can be used as a down payment. Having sufficient equity is an ideal position if you have a car loan.
But if you don't think refinancing is for you but you just need some extra money every month, trading in your current vehicle for something more affordable could be the right move. A trade-in can get you out of a vehicle you no longer want and invest in something cheaper. And any equity you may have can even help you with the down payment on your next loan.
