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Key takeaways
- Cash-out auto refinance replaces your current car loan with a larger loan and gives you the difference in cash.
- You’ll usually need equity in your car, meaning your car is worth more than what you owe.
- It may help if you need cash for an urgent expense or want to pay off higher-interest debt.
- It can also increase your loan balance, extend your repayment timeline and put your car at risk if you can’t make payments.
- If your main goal is lowering your payment or rate, a traditional auto refinance may be a better fit.
Cash-out auto refinance lets you borrow against the equity in your car.
Here’s how it works: You replace your current auto loan with a new, larger loan. The new loan pays off your old loan, and you get the difference in cash.
For example, if your car is worth $25,000 and you owe $18,000, you have $7,000 in equity. A lender may let you borrow some of that equity, depending on your credit, income, vehicle and loan-to-value limits.
That doesn’t mean you’ll always be able to take the full $7,000. Lenders usually have limits on how much they’ll lend based on the vehicle’s value.
Need funds for another financial goal?
See whether refinancing could give you a better rate, lower payment or more manageable term.
How cash-out auto refinance works
The basic formula is simple:
Car value – loan payoff = available equity
| Example | Amount |
|---|---|
| Estimated car value | $25,000 |
| Current loan payoff | $18,000 |
| Available equity | $7,000 |
If approved, your new lender pays off your existing loan and creates a new loan for a higher amount. You receive the cash difference after the original loan is paid off.
Before you move forward, it’s worth checking whether you actually have equity. If you owe more than the car is worth, you may be upside down on your loan.
Cash-out refinance vs. traditional auto refinance
Cash-out refinance and traditional refinance both replace your current auto loan. The difference is what you’re trying to do.
| Option | What it does | Best for | Main risk |
|---|---|---|---|
| Traditional auto refinance | Replaces your current loan, usually without extra cash | Lowering your APR, monthly payment or total interest | A longer term could cost more over time |
| Cash-out auto refinance | Replaces your current loan with a larger one and gives you cash back | Accessing equity in your vehicle | More debt and possible repossession if you can’t pay |
If your goal is simply to lower your payment or interest rate, you may not need the cash-out option. A regular refinance may be enough.
When cash-out auto refinance may make sense
Cash-out auto refinance may be worth considering if you have equity in your car and a clear reason for borrowing.
It may make sense if:
- You need cash for an urgent expense.
- You can qualify for a lower APR than your current loan.
- You want to pay off higher-interest debt.
- The new monthly payment still fits comfortably in your budget.
- You understand the total cost of the new loan, not just the cash you’ll receive.
For example, if you’re using the cash to pay off high-interest credit card debt, a cash-out refinance could lower the interest you’re paying overall. But that only works if the new loan terms are better and you don’t rebuild the credit card balance afterward.
Your credit can also affect the rate you’re offered. If your score has improved since you first financed the car, you may have more options.
When to avoid cash-out auto refinance
Cash-out refinance isn’t free money. You’re borrowing more against your car, and your car is the collateral.
You may want to avoid it if:
- You’re already having trouble making your car payment.
- You’re close to owing more than the car is worth.
- You plan to sell or trade in the car soon.
- You’d use the cash for nonessential spending.
- The new loan has a much longer term.
- The total cost of the loan would go up too much.
If your car payment is already stretching your budget, adding more debt could make things worse. In that case, it may be better to look at ways to handle a car payment that’s too high before borrowing more against the vehicle.
Pros and cons of cash-out auto refinance
| Pros | Cons |
|---|---|
| Can give you access to cash without selling your car | Increases your auto loan balance |
| May offer a lower APR than credit cards or some personal loans | Could cost more over time |
| May help pay off high-interest debt | Your car can be repossessed if you miss payments |
| Lets you keep driving the vehicle | May push you closer to negative equity |
| Could combine cash access with better loan terms | Not every lender offers it |
The biggest risk is negative equity. That happens when you owe more than your car is worth. If you’re already close to that point, taking cash out could make it harder to sell, trade in or refinance later. If that’s a concern, read more about how to get out of a negative equity car loan before applying.
How much cash can you get from refinancing your car?
The amount depends on your equity and your lender’s rules.
Lenders may look at:
- Your car’s current value.
- Your current loan payoff amount.
- Your credit history.
- Your income and debt.
- Your vehicle’s age, mileage and condition.
- The lender’s loan-to-value limit.
Even if your car has equity, you may not qualify to borrow all of it. Lenders usually want to leave a cushion so the loan doesn’t exceed the vehicle’s value.
Before deciding, compare the new loan against your current one. A lower monthly payment can look appealing, but it may cost more if the loan term is longer.
Cash-out auto refinance requirements
Requirements vary by lender, but you’ll typically need:
- Positive equity: Your car should be worth more than your current loan payoff.
- A qualifying vehicle: Lenders may have limits for age, mileage or condition.
- Steady income: You’ll need to show you can afford the new payment.
- Acceptable credit: Better credit may help you qualify for a lower rate.
- A manageable loan-to-value ratio: The new loan usually can’t exceed the lender’s limit based on your car’s value.
You may also need documents like your current loan payoff, vehicle information, proof of income, proof of insurance and identification.
Alternatives to cash-out auto refinance
Cash-out refinance isn’t the only way to get financial breathing room.
| Alternative | May be better if… |
|---|---|
| Traditional auto refinance | You mainly want a lower payment or APR |
| Personal loan | You don’t want to use your car as collateral |
| Balance transfer credit card | You qualify for a low or 0% promotional APR |
| Lender hardship option | You’re struggling to make payments right now |
| Selling the car | The loan or payment no longer fits your budget |
| Paying down the loan first | You’re close to negative equity |
If your main goal is savings, not cash, compare offers carefully. A refinance that lowers your rate may help reduce your monthly payment or total interest.
Is cash-out auto refinance a good idea?
Cash-out auto refinance can be helpful in the right situation, but it’s not the right move for everyone.
It may be a good idea if you have strong equity, qualify for reasonable loan terms and need the cash for something important. It may be a bad idea if it leaves you with a higher payment, a longer loan, more interest or a car loan that’s close to negative equity.
The key question is simple: Will the cash help more than the added debt hurts?
Bottom line
Cash-out auto refinance lets you turn some of your car’s equity into cash, but it comes with trade-offs. You’re increasing the amount you owe on a loan backed by your vehicle. That means missed payments could put your car at risk.
Before applying, check your equity, compare loan terms and make sure the new payment fits your budget. If you mainly want a lower rate or monthly payment, a traditional auto refinance may be the safer place to start.
FAQs: Cash-out auto refinancing
Can you refinance a car and get cash back?
Yes, if you qualify for cash-out auto refinance. Your new loan pays off your current auto loan and gives you some of your vehicle equity in cash. The amount depends on your car’s value, your loan payoff and your lender’s rules.
How much equity do I need for cash-out auto refinance?
There’s no single number that applies to every lender. In general, your car needs to be worth more than what you owe. The more equity you have, the more flexibility you may have, but lenders usually limit how much you can borrow.
Does cash-out auto refinance hurt your credit?
Applying may cause a hard credit inquiry, which can temporarily lower your score. The bigger impact comes from how you manage the new loan. On-time payments can help your credit over time, while missed payments can hurt it.
Can I get cash-out refinance if I’m upside down on my car loan?
Usually, no. If you owe more than the car is worth, you don’t have equity to borrow against. Some lenders may offer other refinancing options, but taking cash out typically requires positive equity.
Is cash from an auto refinance taxable?
Cash from a refinance generally isn’t treated as income because it’s borrowed money, not earned money. But tax rules can vary, so it’s best to ask a tax professional if you’re unsure.
What’s the biggest risk of cash-out auto refinance?
The biggest risk is taking on more debt than you can comfortably repay. Since the loan is secured by your car, missed payments could lead to repossession. It can also push you closer to negative equity, making it harder to sell or trade in the car later.
