Owning a car is a significant investment. Over the tenure of your car loan, you end up repaying far more than what you actually borrowed, owing to interest, processing fees and other charges levied by banks and non-banking financial companies (NBFCs). As you continue your monthly repayments, you slowly build equity in your car, which is the current resale value minus what you still owe on the loan.
The equity component keeps going up as the pending loan amount reduces. Now, instead of keeping this equity locked, you have the option to tap into it by doing what is called a “cash-out auto refinance”. Let us explore what a cash-out car loan refinance and the reasons for cash-out car refinance.
What Is a Cash-Out Car Loan Refinance?
In a cash-out car loan refinance, you essentially take out a new, larger loan that pays off your existing car loan, plus get some extra cash over and above the payoff amount. This surplus cash goes directly into your bank account for utilisation towards any other financial goals or expenses.
Top Advantages of a Cash-Out Car Refinance
Here are some of the compelling reasons for cash-out car refinance:
1. Get Lower Interest Rates
Refinancing your automobile loan can allow you to benefit from getting a more competitive interest rate compared to when you originally financed your car, possibly several years earlier. Interest rates can fluctuate a lot over the years.
By doing a cash-out refinance to secure a more current low rate, you stand to save a substantial amount of money by reducing your interest charges over the full loan tenure. Even if you do not actually need extra cash in hand, the savings from reduced interest rates themselves make refinancing advantageous and something to consider seriously.
2. Consolidate Your Debts
In addition to the car loan itself, many applicants today have accumulated additional debts like personal loans, credit cards or payments for other assets, which come with higher interest rates. This impacts their ability to repay and leads to an increased debt burden.
By doing a cash-out auto refinance, you can consolidate multiple existing high-interest liabilities into a single manageable monthly instalment, that too at a much lower interest rate. This helps simplify your financial position.
3. Access Equity in Your Vehicle
As you continue paying off your existing car loan as per the tenure and amortisation, you slowly build equity in the vehicle. The equity is essentially the current worth of the car minus what you still owe to the bank or NBFCs. This equity component keeps increasing as the pending loan amount goes down over time.
Tapping into this equity through a cash-out refinance enables you to access cash that you have already technically earned as part of the asset appreciation, which you can now extract in part.
4. Fund Major Purchases
In the future, most families require substantial funds for a significant purchase outside of their regular household expenditure budget - whether it is renovating their home, financing their child’s higher education, planning an international family vacation or celebrating a milestone occasion.
However, the excess cash needed for such goals may not always be available. This is where the flexibility of a cash-out refinance is very useful. The extra cash amount obtained can be effectively used to cover the costs of these larger purchases, which otherwise families may have to postpone indefinitely.
5. Pay Emergency Expenses
Life is unpredictable, and emergencies can arise anytime, such as a considerable unexpected medical expense for a family member, critical home repairs, temporary job loss or income decline. Most households do not have spare cash reserves to cover such contingencies.
While credit cards and personal loans seem like quick financing options, their very high interest rates create a further financial burden. Utilising equity through a cash-out auto refinance can provide affordable funds to cover urgent emergency costs without having to opt for other, more expensive debt options.
6. Improve Credit Utilisation
An indirect cash-out refinancing advantage of consolidating your existing credit card dues into the refinanced car loan amount is that it drastically lowers your overall credit utilisation levels. Credit utilisation refers to the percentage of your total credit limit that is currently utilised through loans and debts.
High credit utilisation negatively impacts credit scores, whereas lowered utilisation helps improve creditworthiness. However, you must be careful not to max out your credit cards again after consolidation, as that would undo any positive impact on credit scores.
Conclusion
Reasons for cash-out car refinance include utilising your car’s equity which can provide useful cash to consolidate debts at a lower rate, pay for expenses, or access funds in an emergency. However, the longer loan terms and risk of repossession should also be considered. Shriram Finance offers vehicle loan refinancing with competitive interest rates and flexible repayment options. Evaluate your options to see if cash-out refinancing makes sense rather than taking out additional high-interest debt.
