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What is cash-out car loan refinancing and is it a good idea?

What is cash-out car loan refinancing and is it a good idea?

Regular readers of this blog will know that I like to take customer questions and address them to a wider audience here. This week is no different but includes a question I haven’t heard before. Namely, what is cash-out car loan refinancing and is it a good idea?

As the name suggests, this is loan refinancing where you borrow more to give you cash to spend on whatever you want.

Cash-out car loan refinancing

Cash-out car loan refinancing is a possibility for those who have paid off a significant part of their existing car loan. If your car is worth more than the outstanding finance, it is possible to refinance to the maximum value of the car. This gives you an amount of spare cash to use as required.

The principle is similar to remortgaging where you borrow more against the value of your home. You can use the cash to settle debts, consolidate debts or use for something else.

For example, your car is worth $15,000 and you have $6,000 outstanding on your current car loan. You could in theory borrow an extra $9,000 to take the loan up to the value of the car to use as you see fit.

You can have free cash and perhaps a lower interest rate too.

Is cash-out car loan refinancing a good idea?

Cash-out car loan refinancing can be useful for people in certain situations.

  • Consolidating debt – If you plan to use the extra cash to pay off other debts then it can be a good idea. Having a single, larger payment each month can be much easier to manage.
  • Better interest rate – If your current interest rate isn’t the best and you have the credit score to access better rates, you could end up saving money on interest. However, be mindful that interest will increase again with the refinancing.
  • Emergency cash – If you need cash for an emergency home repair or other urgent action, refinancing can be a viable way to get it.

Cash-out car loan refinancing may not be a good idea if:

  • Your income to debt ratio is already high – You may not be able to qualify for refinancing if you already have a lot of debt. If you’re planning to consolidate, you can work with us to find a deal though.
  • You don’t want to risk going upside down – Car depreciation rates are fairly steady right now but that could change. Borrowing up to the car’s value could risk you going into negative equity on your loan.
  • If you’re struggling to service debt – If you’re already struggling with debt, borrowing more, even to consolidate other debt, may not be your best option.

Cash-out car loan refinancing is not available everywhere or with every lender but it is possible. As always, we suggest discussing it with your financial adviser or one of our car loan specialists beforehand. There may be better alternatives out there!

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