Cash back car loan refinance is like traditional refinance in the sense that you are applying for new, more favorable terms to replace your current loan. In addition, you will also receive a cash lump sum as part of the refinancing. The amount you receive depends on the existing equity of your vehicle.
Car owners may consider this type of refinance if they urgently need cash for an emergency, but this choice carries the risk of increasing the borrower’s debt.
What is Cash Back Auto Refinance?
A cash back car loan refinance allows you to match and refinance your current loan to an amount greater than you owe and receive that additional amount in cash. This type of loan is usually used by people who need extra money.
The process takes the value of your vehicle and converts it into cash that you can walk away with. This means that while you refinance your current loan on new terms, you get extra money in the form of cash by borrowing more than the car’s true value. Not all lenders offer this service, and it can result in some drivers losing their vehicle entirely due to the increased likelihood of being flipped upside down.
Upside down means your outstanding loan balance is more than the vehicle is worth. In other words, if you owe $4,000 on a car loan but the car is only worth $2,000, then the loan is upside down. Unless you’re planning on selling the car, being upside down isn’t necessarily a problem. Just keep making payments and paying off the loan.
On the other hand, if you’re hoping to trade in your vehicle, standing upside down can be a challenge. You must balance the negative equity yourself.
How to Apply for Automatic Cash Back Refinance
The process of applying for a cash back auto refinance is similar to a traditional refinance. All it requires is paperwork and research. After you determine how much your vehicle is currently worth – through outlets like Kelley Blue Book – you will have an idea of the vehicle’s equity level. This number indicates how much cash you can potentially receive.
Finding a lender that offers automatic cash back refinancing will take a little more work. Not all lenders offer this service. After researching different lenders, compare the terms and determine which option is best for you. Pay special attention to the amount of money you receive. After the application and loan approval, you walk away with new loan terms and the extra money.
When is a Cash Back Auto Refinance a Good Idea?
To determine if cash back auto refinance is an option that could lead to more financial problems, you need to consider your spending habits. Because this choice means you’re borrowing more money than you already owe, you’re creating more debt. If you are currently struggling to make your monthly payments, it could make your financial situation worse.
The two main benefits of cash back refinancing are improved credit terms and additional cash.
- Improved credit conditions. Just like with classic refinancing, this process gives you more favorable credit terms. But even if it’s possible to lower your monthly payment, you’re only extending the life of your loan and increasing the overall cost.
- Additional cash. You get money from a cash back refinance, which can be especially helpful if you need extra cash for an emergency. However, this is a short-term solution that could lead to higher interest rates.
Automatic cash back refinancing is a good idea when you’re in financial distress and need money or need to adjust your current loan to suit your lifestyle.
How much can I borrow with a cash back loan?
The amount you can borrow, and therefore the amount of cash you receive, depends on a few factors.
- The lender. Not all lenders offer a cash back option due to the increased risk.
- vehicle value. The value of your vehicle will determine the amount of money your lender will give you.
- your credit history. As with most financial circumstances, your creditworthiness and history serve as a key measure of whether your loan will be approved. The better your credit rating, the more favorable conditions you will receive.
Cash Back Refinancing Risks
Before proceeding with cash back auto refinancing, it is important to consider all the risks involved.
- Turned upside down on loan. You are more likely to get upside down or underwater on your loan. As the car’s value decreases, the likelihood of your loan to value being under water increases – you owe more than the vehicle is worth.
- take on more debt. If you borrow more than you owe, you end up with even more debt on your plate.
- risk of withdrawal. If you’re struggling to keep up with your monthly payments, extending your loan may not be enough to address deeper financial problems. This could mean your vehicle being stolen if you don’t pay.
- Few lenders to choose from. Not all lenders offer this type of financing, so you may have very few options to choose from when shopping.
The final result
Cash back refinancing can be a good option if you want to get better terms on your car loan or if you need cash urgently. The first step when considering this type of refinance is to research the current value of your car. This helps determine how much money a lender may be willing to give you.
However, remember that cash back refinancing comes with risks. You’re taking on more debt by refinancing the car loan for more than what’s currently owed, and you also risk turning the loan upside down.