Auto loan consolidation involves taking out a new loan and using it to pay off two or more car loans. You can also consolidate auto loans with other types of loans. Instead of juggling multiple payments, consolidation means you’ll only need to make one monthly payment. In some situations, you may even be able to save money by getting a lower interest rate.
Having multiple car loans at once can quickly become overwhelming. Keeping track of different monthly payments, due dates, and interest rates is difficult. Fortunately, consolidating your auto loans into one single loan can help simplify repayment. In this comprehensive guide, we’ll explore what auto loan consolidation is, who it’s for, its pros and cons, and how to actually go about combining your car loans.
What is Auto Loan Consolidation?
Auto loan consolidation involves taking out one new loan and using it to pay off two or more existing car loans This allows you to combine multiple monthly payments into just one, making repayment much simpler.
While there are no loans specifically for consolidating auto debt, you can use other products like personal loans, home equity loans, balance transfer credit cards, and more The result is the same – multiple car loans are combined into a single monthly bill.
Auto loan consolidation is different from refinancing, where you take out a new loan to pay off a single existing loan to get better terms. With consolidation, the goal is to streamline multiple loans into one, regardless of rates.
Who is Auto Loan Consolidation For?
Consolidating your auto loans can be a smart move if:
- You’re struggling to keep track of multiple car loan payments with different lenders
- You want to simplify repayment into a single monthly bill
- You have a good credit score and could potentially qualify for a lower interest rate
- You need help managing higher monthly payments after purchasing multiple vehicles
Specifically, consolidation tends to work best for borrowers with good to excellent credit (scores above 660). This helps ensure you can qualify for reasonable interest rates on a consolidation loan.
On the other hand, consolidation may not be advisable if you have bad credit or only have one or two car loans. Refinancing each loan separately may be better in those cases.
The Pros and Cons of Auto Loan Consolidation
Here are some key pros and cons to weigh when considering combining auto loans:
Pros
- Simplifies repayment with just one monthly bill instead of multiple
- Can potentially save money if you secure a lower interest rate
- Helps improve your credit mix by adding an installment loan
- Makes managing cash flow easier with a single payment
- Frees up mental bandwidth from tracking multiple loans
Cons
- Consolidation loans have fees, closing costs, and prepayment penalties
- Won’t fix poor spending habits that led to accruing debt
- Temporarily lowers average account age, hurting credit scores
- Bad credit borrowers may not benefit from higher consolidation loan rates
- Risk losing vehicles if unable to pay the consolidated loan
As you can see, there are good reasons to consolidate auto loans, but also some drawbacks to keep in mind. Make sure consolidation aligns with your financial situation and goals.
How to Consolidate Your Auto Loans in 5 Steps
If you decide auto loan consolidation is right for you, here are the basic steps to combine loans:
1. Pick a Consolidation Loan Type
You’ll need to choose a loan or credit product to consolidate your car loans into. Here are some top options along with pros and cons:
- Personal Loans: Unsecured loans with fixed rates and terms up to 7 years.
Pros: No home/car collateral, predictable payments
Cons: Higher rates than secured loans
- Home Equity Loans: Secured loans using home equity as collateral.
Pros: Lower rates, flexible spending
Cons: Risk losing home, closing costs
- Balance Transfer Cards: 0% intro APR cards used to pay off debt.
Pros: Low/no interest period
Cons: Temporary solution, high long term rates
I recommend personal loans for most borrowers since they are easy to qualify for and have fixed rates. Home equity loans also offer low rates given the collateral.
2. Check Credit Score and Income
Lenders will check your credit, debt-to-income ratio, and income when applying. Good credit and stable income are key to getting approved and securing reasonable loan terms.
Aim for a credit score over 660 and a debt-to-income ratio below 50% before applying. Tidy up your credit report and pay down balances if needed.
3. Shop Around and Compare Loan Offers
Don’t just apply with one lender. Take the time to shop around and compare offers from multiple consolidation loan providers. This helps ensure you get the best rate for your situation.
I recommend using an online loan marketplace like LendingTree to view multiple loan offers in minutes with a single form. Be sure to provide the same info to each lender for accurate comparisons.
4. Choose the Best Loan and Complete the Application
Once you’ve compared all the offers thoroughly, pick the consolidation loan with the lowest rate, most comfortable payment, and favorable fees. Submit a full application and necessary documents to get formally approved.
5. Finalize the Loan and Pay Off Auto Debt
The last step is finalizing the new consolidation loan, signing the agreement, and receiving your funds. Use the payout to pay off your existing car loans right away. Make sure to close these accounts once paid off.
And that’s it! Stay diligent about making your new single monthly consolidation loan payment on time going forward. Enrolling in autopay can help avoid missed payments and credit score damage.
Alternative Ways to Tackle Multiple Auto Loans
Auto loan consolidation combines loans into one, but may not always be the best approach. Here are a few alternatives to consider:
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Auto Loan Refinancing: Taking out a new car loan at better rates to pay off an existing loan. This simplifies repayment but only handles one loan.
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Debt Avalanche Method: Focusing repayment on the loan with the highest interest rate first. This mathematically saves the most on interest paid over time.
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Debt Snowball Method: Paying off loans with the smallest balance first. This creates quick wins and motivation to keep attacking debt.
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Budgeting and Money Management: Making a budget to cut expenses, earn more income, and put as much money toward debt repayment as possible each month. The key is changing habits.
For some borrowers, aggressively paying down one car loan at a time or budgeting to overpay loans could save more money than consolidation. Crunch the numbers for your situation and lifestyle.
Finding the Best Auto Loan Consolidation Lenders
The lender you choose for your consolidation loan is incredibly important. Here are some tips for picking the right lender:
- Compare rates from national banks, local credit unions, online lenders, and peer-to-peer lending platforms.
- Consider both long-standing lenders and newer fintech lending companies.
- Look for minimal fees, flexible loan amounts, and discounts for autopay or existing customers.
- Read reviews and complaints to avoid lenders with predatory practices or hidden fees.
- Ask about forbearance or hardship options if you might struggle with repayment.
Reputable lenders known for auto loan refinancing like Lightstream, PenFed, and LendingClub are great options to consider. I also recommend looking at online lending marketplaces like LendingTree that let you easily compare personalized loan offers.
Improving Your Chances of Consolidation Loan Approval
It’s possible to get rejected when applying for an auto loan consolidation loan. Here are some tips to boost your approval odds:
- Have a credit score over 660 (ideally over 720)
- Keep credit card balances below 30% of their limits
- Show steady income that sufficiently covers the proposed loan payment
- Have limited recent credit inquiries and open accounts
- Provide strong proof of income through tax returns, pay stubs, etc
- Use a co-signer if your credit is lacking
The higher your credit score and income, the better your chances. But even borrowers with fair credit scores around 640 still have consolidation loan options if the above criteria are met.
Are Auto Loan Consolidation Loans a Good Idea?
At the end of the day, is consolidating your car loans actually a smart financial move? In many cases, yes – auto loan consolidation loans can be beneficial by simplifying repayment, helping secure lower interest rates, and improving cash flow.
But consolidation also has risks, mainly losing your vehicles if you default on the new combined loan. And for some borrowers, aggressively paying down individual loans may make more sense.
Carefully weigh the pros and cons and crunch the numbers to determine if consolidation is right for your unique situation. Getting ahead of auto loans is possible with the right strategy.
The Bottom Line
Having multiple auto loans and debts can certainly feel overwhelming. But consolidating your car loans into one streamlined loan can help simplify repayment and potentially even lower interest costs.
Just be sure to compare all of your consolidation loan offers thoroughly. And make sure to change any troubling spending habits so you don’t end up in debt again. With the right diligence and discipline, loan consolidation can help you manage debt and improve your finances over the long haul.
Consolidating auto loans vs. refinancing
You might want to consider refinancing instead. Refinancing an auto loan involves taking out a new loan to pay off one loan, not multiple debts. The goal is simply to secure a better interest rate or more favorable loan terms.
There are also some differences in how these loans are structured. Auto refinance loans typically use the car as collateral to secure the loan. In this case, the lender takes on less risk, since it has the right to repossess the vehicle if you stop making payments. As a result, you can typically expect a lower interest rate.
However, many debt consolidation loans are unsecured loans, which often have higher interest rates than secured loans.
Now that you know a little bit more about auto consolidation loans and how they work, let’s take a closer look at how to consolidate auto loans. As a rule of thumb, the process will likely follow these steps:
Gather the required documents
The exact type of documentation you’ll need will depend on the type of loan you choose. However, in general, you should be prepared to provide information on the following metrics:
- A credit score that officially meets lender criteria: You’ll likely be asked to undergo a credit check and may be asked to provide personal information, such as your Social Security number and home address.
- Sufficient income to repay the loan: Employment records and bank statements will be used to show ability to pay back the debt.
- A reasonable debt-to-income ratio: This shows the lender what percentage of your income is already being used to repay existing debts.
- Paperwork on any collateral: You’ll need to show records for any assets being used to secure the loan.
How to Consolidate Car Loans
FAQ
Can a car loan be included in debt consolidation?
Does debt relief work for car loans?
Does debt consolidation hurt your credit?
How to get your car loan forgiven?
Can You consolidate a car loan?
With loan consolidation, you can use a different kind of loan to borrow money and pay off your old debt. This consolidates your debt under one new loan. Technically, there isn’t a specific type of loan for consolidating car loans. This new loan could be an unsecured personal loan, a home equity loan or line of credit, or even a credit card.
How does debt consolidation work?
Borrowers can use a personal loan, balance transfer credit card, or home equity loan for this purpose.Once the new funds pay off the old debts, the borrower makes a single monthly payment on the new loan.It
What is auto loan consolidation?
Auto loan consolidation involves taking out a new loan and using it to pay off two or more car loans. You can also consolidate auto loans with other types of loans. Instead of juggling multiple payments, consolidation means you’ll only need to make one monthly payment.
Can a debt consolidation loan include a car loan secured by collateral?
Typically debt consolidation loans can’t include loans secured by collateral, such as auto loans. Companies that advertise otherwise are usually offering debt settlement services, which should be a last resort. Shannon Bradley covers auto loans for NerdWallet.