Although handy, cash-out auto refinancing can also be risky. It’s essential to have a full understanding of what you’re getting into before jumping in.
Pros
May be good for consolidating debt
You could put your cash-out auto refinance toward debt consolidation. This only makes sense if your new car loan comes with a lower APR than what you carry on your current debt.
Can provide funds for emergency expenses
In a financial emergency, tapping your car’s equity could be better than turning to a credit card.
According to a LendingTree study, the average credit card interest rate in October 2023 was nearly 25%. If you have good to excellent credit, a cash-out auto refinance loan has much lower interest rate.
Possible to pay less interest or a lower monthly car payment
You may qualify for a lower APR if your credit score has gone up since you first bought your car. Additionally, you could opt for a longer loan term. If you extend your term, your monthly car payment will likely go down (but you’ll pay more interest over time).
Cons
Increased risk for an upside-down car loan
Since you’ll have less (or no) equity after a cash-out auto refinance, you may find yourself with an upside-down car loan. This means you may owe more on your vehicle than it’s worth and is also referred to as being underwater.
Even if you aren’t upside down right away, your risk for an upside-down loan increases after a cash-out refinance. Remember, your car will also likely depreciate as time passes, further reducing your equity.
Being underwater on your car loan is a pain. You may need to make a down payment on your current loan before you can sell or trade it in when you’re upside down. You usually need to pay the difference between your loan balance and your vehicle’s value to regain positive equity.
Thinking about a cash-out auto refinance? You may want to consider adding GAP insurance.
If you’re taking a cash-out auto refinance, you may also want to purchase GAP insurance. This can help hedge some risk if you go upside down on your loan.
GAP, or guaranteed asset protection, pays the difference between your vehicle’s value and your loan balance if your car is totaled or stolen. Many cash-out auto refinance companies — such as Autopay and RefiJet — offer GAP for an additional cost.
Adds to your debt
By its very nature, cash-out auto refinancing requires you to take on more debt than you had before you started. Essentially, you’re negating any progress you’ve made in paying off your vehicle.
Interest costs could be higher
While your new loan may carry a lower APR, you could still pay more interest over the life of your loan(s). If you refinanced two years into a five-year auto loan, and your new loan has a five-year term, it’ll be seven years total before you own your car outright.