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Similar to a home equity loan, a cash-out refinance on a car "cashes out" any equity in the car when a refinance is done and the extra money goes to the borrower to use as he or she pleases. This type of loan works well for people who find themselves needing some extra cash while also owing much less on their car than what it is worth. The new loan is written for the full value price of the car.
For example, if a person has a car which is worth fifteen thousand dollars but they only owe nine thousand dollars on the loan, the person can refinance for the full fifteen thousand dollars and walk away from the transaction with six thousand dollars to spend. Not every lender will do this type of car refinance, and it is generally not advised by credit experts to cash out on car equity for frivolous spending or extra cash. On the other hand, this is a viable option for someone who needs a large amount of money unexpectedly and happens to have auto equity available. People who have paid-off cars can use this type of loan as well, and get a lower interest rate than if they had used a personal loan for the money.
|Jennifer Mathes, Ph.D.|