What Is Cash Out Auto Refinance?

Cash-out auto refinance is a good opportunity to lower the rate and cut borrower’s costs. However, this service is not always profitable and is not suitable for all motorists. When does it make sense? Where to go if you have decided to apply for cash-out auto refinance? How does the procedure take place? We answer the most important questions in the article.

What is cash-out auto refinance?

Cash-out auto refinance is a special procedure. It works as follows: the borrower who has a car loan receives a loan from another bank sufficient to fully or partially repay the debt.

Reasons for refinancing a car loan

This procedure can be beneficial for many reasons. Below are the main ones.

1. Unsatisfactory financial conditions for a car loan. It is no secret that many clients apply for car loans under the influence of the moment – yielding to the seller’s persuasion when they see the desired car model. At the same time, borrowers often do not assess their capabilities and take on an unbearable loan burden. In addition, express loans in car dealerships cannot be considered very profitable – after all, the rates on such loans often exceed 20-25%, which is comparable to cash loans. In this case, the borrower also has to bear additional costs. In this case, obtaining a refinancing loan from another bank and repaying the loan seems to be a very attractive option;
2. High monthly payments. Very often borrowers take out auto loans for short periods (due to the terms of the credit program or wanting to reduce overpayment), while the loan amounts are usually quite large. These two parameters generate large monthly payments that can shake the family budget. Therefore, it is often more profitable to refinance a car loan for a longer period, even with an increase in the interest rate and overpayment. Thus, monthly payments are reduced and the borrower can more freely dispose of his/her funds;
3. Additional commissions and insurance (and often also life and health insurance) for car loans significantly increase the overpayment. They can be avoided by taking out a refinancing loan and repaying an unprofitable loan at this expense;
4. A pledge of a car bought on credit in a bank can be quite a big inconvenience: during the term of the loan agreement, the borrower cannot sell or exchange his/her car without the consent of the bank. This problem is especially relevant for the last months of using a loan when the amount of debt is already small, but the restrictions do not change. After repaying a car loan through on-lending, the borrower can withdraw his/her car from the collateral;
5. The desire to change the car for a new one can also become a reason for refinancing under the trade-in scheme: the bank gives the borrower a loan to pay off the remaining debt and purchase a new car, and the old one can serve as a down payment on a new car loan;
6. Consolidation of several bank loans into one loan is also often the reason for taking a cash-out auto loan. Receiving a large loan on favorable terms (for example, secured by real estate), the borrower has the opportunity to pay off debts in banks and strengthen his/her financial position. In this case, monthly payments and overpayment on loans are reduced, and it becomes much more convenient to make settlements with the bank.