You may find yourself in a financial pickle every once in a while, and there may be that tempting allure of using a cash-out auto refinance offer on your car. But there are some things that you should consider before you race to get that new auto loan. Learn more about the simple risks that you should weigh before making this important decision.
Value of the Car
First, assess the value of your car. Will you have it paid off soon? What is it worth on the retail market? How much money can you actually pull out of the car via a loan? What interest rate will you be offered, and how much will the repayment actually accrue in interest charges. Usually, you will pay a large amount of interest that will be near to what the value of your car is right now. Look carefully at the interest section of the paperwork that tells what your overall cost is to finance this vehicle. Once you see that number, you will quickly realize that pulling the cash out costs you an arm and a leg.
Depreciating Asset
Since cars are a depreciating asset, they will lose value over time. But as your car loses value, the loan still is there. It does not lose value. If your car is really old, you could end up with lots of maintenance also costing you money as the car further depreciates. This can put you in another bind that we will explain for you.
Stuck in an Upside-Down Loan
Once a car is worth less than the loan that's taken out on it, it's considered to be underwater. This means that there is no equity in the car. You won't be able to refinance it again, and if the need arises to buy a new car, you will have to roll a lot of money into the new auto loan, thus increasing your monthly payment. This could result in you having to roll over thousands of dollars into your new car, adding a lot more to the monthly payment.
Cars Are Not Investments
The most important thing to realize is that a car is not an investment. It's a transportation tool. From the moment that you drive your car off the lot, it loses nearly 25% of its value. From there, it continues to depreciate until the equity helps you get back on top. It's a very careful balance, one that can be disrupted with a cash-out refinance.
So tread softly here and be sure you weigh all of your options first.