Owning a car is a major financial commitment that typically spans several years. Over the tenure of your loan, you end up repaying the bank or non-banking financial companies (NBFC) much more than what you actually borrowed when you factor in interest, processing fees and other charges.
As you diligently repay your loan month after month, you slowly start building up equity in your car. The equity is essentially the current resale value of the car minus what you still owe on the outstanding loan. Instead of keeping this equity unused, you actually have the option to utilise it through a process called cash-out auto refinancing.
In a cash-out refinance, you take out a new, larger loan that pays off your existing car loan, and you get some extra cash over and above the payoff amount. This surplus money goes directly to your bank account for you to utilise towards other expenses and financial goals.
This article covers six major benefits of cash-out loan refinancing and provides recommendations on whether it suits your needs.
What are the Advantages of Cash-Out Car Loan Refinancing?
Here are some of the compelling benefits of cash-out refinancing:
1. Get a Lower Interest Rate
Interest rates keep changing based on monetary policies and market dynamics. Therefore, if you originally financed your car years ago, chances are that the interest rates currently are much lower. Through a refinance, you can change your loan to a more competitive prevailing rate and save substantially on interest charges. Even if you do not need extra cash, the interest savings themselves may justify doing a refinance.
2. Consolidate Other Costly Debts
In addition to their car loan, many individuals have accumulated other liabilities like personal loans, credit cards or loans against property, which sometimes have higher interest rates. This impacts their ability to repay and leads to ballooning debt obligations. By consolidating these scattered high-interest debts into the refinanced car loan amount, you simplify finances and reduce the interest burden through a single Equated Monthly Instalment (EMIs) at a lower rate.
3. Utilise Accrued Equity in Your Car
As you repay your existing car loan month after month, the principal outstanding keeps reducing while a portion of your EMI goes towards interest and other charges to the lender. This creates equity, which is the car’s current value minus what you still owe on it. Utilising this equity through a cash-out refinance enables you to extract surplus cash that you can now use towards other goals. Treat it as accessing savings you have already accrued rather than taking on new debt.
4. Finance Larger Ticket Expenses
At various stages of life, families may require substantial sums for bigger expenses outside the usual monthly budget, whether for home renovation, a dream vacation, higher education costs or for celebrating milestones. Very few households have sufficient liquid savings on hand for such needs.
A cash-out auto refinance provides an apt financing tool at a reasonable interest rate without needing other credit facilities.
5. Manage Emergency Costs Smoothly
Unfortunately, unforeseen events can arise anytime such as medical emergencies, critical home repairs, or temporary income decline, that require large amounts of cash. While credit cards provide quick funds, the high interest costs on flexible credit make it difficult to repay. This is where utilising your car’s equity through a refinance helps by providing affordable financing to cover unexpected expenses without falling into more debt.
6. Potentially Improve Credit Score
An indirect benefit of cash-out refinancing is that it consolidates existing credit card dues and other loans into your refinanced car loan amount, it lowers your overall credit utilisation levels quite drastically. Using too much of your available credit shows you rely heavily on borrowing and can lower your credit score. As this ratio reduces, it signifies prudent financial management, which can help improve your credit rating over time. Of course, care must be taken to avoid maxing out cards again, which reverses any positive impact.
Conclusion
Utilising your car’s equity can provide multiple benefits in terms of interest savings, debt consolidation, financing major expenses, covering emergencies, and boosting your credit score. However, aspects like higher total repayment and risk of repossession in case of payment issues must also be evaluated. Shriram Finance provides used car loans and car refinancing products that let you access funds by leveraging your car’s value, but this is only possible if there is no existing loan on the vehicle at the time of refinancing.
Analyse both pros and cons relative to your financial situation realistically before deciding if cash-out auto loan refinancing suits your needs instead of taking other costly loans. If structured judiciously, there are many benefits of cash-out car loan refinancing, and it can be an efficient debt management tool.
