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 loans and debts can feel overwhelming Debt consolidation auto loans allow you to simplify your finances by combining multiple loans into one new loan At first glance, this may seem counterintuitive – why take out another loan when you already have debt? But consolidation offers key benefits that make it a smart financial move for many people.
In this comprehensive guide, we’ll explain what debt consolidation auto loans are, who they can help, advantages and disadvantages, and things to know before getting one By the end, you’ll understand if and how consolidation could improve your financial situation
What Is A Debt Consolidation Auto Loan?
A debt consolidation auto loan brings together multiple existing auto loans into one new loan. The idea is to take out a new loan for the total amount owed across the loans being consolidated. This loan pays off and closes those accounts leaving you with just the one new debt consolidation loan.
Consolidating is commonly done to:
- Lower the interest rate on auto debt
- Extend the repayment term to reduce monthly payments
- Simplify finances by having just one loan payment
Essentially, you replace what might be 3, 4 or 5 separate auto loans with different lenders, interest rates and payment due dates with a single new loan.
Who Is A Good Candidate For An Auto Debt Consolidation Loan?
If you have multiple auto loans – for example, separate loans on two vehicles, or a car loan plus a motorcycle loan – consolidation may benefit you. It tends to help borrowers who:
- Have high interest rates on their current auto loans
- Struggle to keep up with multiple loan payments each month
- Want to simplify record-keeping and finances
Consolidating works best if you can qualify for a lower interest rate on the new loan. This allows you to save money on interest over the loan term.
Borrowers with good credit (FICO scores of 690 or higher) are more likely to meet requirements for the lowest auto loan rates. But even those with lower scores could benefit from consolidation if they get a rate that’s lower than their current highest rate.
Key Benefits Of Auto Loan Consolidation
Taking out a debt consolidation auto loan can offer multiple advantages:
Lower Interest Rate
The top benefit is the potential to reduce your interest rate, which decreases the total cost of your auto loan debt. Rates on your existing loans likely range from 3% to 20% or more. Through consolidation, you may qualify for a rate around 5%, for example.
The lower rate applies to the entire loan balance, so you save money versus keeping higher rate loans. This makes consolidation a form of interest rate arbitrage.
Lower Monthly Payment
Consolidating can provide payment relief by extending your repayment term. For example, if you previously had 3-year loans but consolidate into a 5-year term, that extra two years means a lower monthly payment.
This helps if you were struggling to cover multiple loans each month and needed reduced payments. Just keep in mind a longer term equals more interest paid.
One Payment And Due Date
Instead of tracking different payment amounts and payment dates for individual loans, you’ll have a single auto loan payment each month. It simplifies your record-keeping and budgeting.
Pay Off Debt Faster
A lower interest rate and consolidated payment let more of your money go toward paying down principal each month rather than interest. The result can be becoming debt-free sooner than keeping multiple high-rate loans.
Improve Credit Score
Since your total auto loan debt decreases through consolidation, your credit utilization ratio improves. This factor in your credit score measures how much you owe versus available credit limits. As utilization drops, your score may increase.
Key Drawbacks To Consider
Debt consolidation auto loans also have some potential disadvantages to keep in mind:
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Credit inquiries – Applying for a consolidation loan can result in hard inquiries on your credit report, which could temporarily lower your score. Not all lenders do hard pulls for prequalification, though, so you can shop around.
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Higher total interest – While the rate is lower, stretching out the repayment term results in more interest paid over the full loan period versus a shorter term.
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Closing old accounts – Consolidating pays off and closes your previous loans. This can shorten your overall credit history length and reduce your mix of credit types, also lowering your score.
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No improvement – If you don’t actually qualify for a lower rate on the consolidation loan, there is no benefit to proceeding. The higher balance could even worsen your situation.
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Debt temptation – Some borrowers are tempted to use the consolidation process as a chance to pull cash out for other purposes. This adds to your total debt.
As long as you avoid potential pitfalls – like taking cash out or consolidating at a higher rate – you can minimize risks and focus on the positives.
What To Know Before Applying For An Auto Debt Consolidation Loan
If you think consolidating your auto loans could make financial sense, here are tips to follow:
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Check your credit – Review your credit reports and FICO score so you know where you stand before applying for a consolidation loan. This determines the rate you can likely qualify for.
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Calculate potential savings – Add up your total loan balances and the interest rates. Use an auto loan calculator to estimate potential new monthly payments and total interest costs at different rates, loan amounts and terms.
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Research lenders – Compare options from banks, credit unions and online lenders. Consider prequalification without a hard credit check. Resist high-pressure sales tactics.
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Avoid extending too long – While a longer repayment term reduces your payment, too long a loan means extra interest expense. Keep it within 5 years if possible.
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Read the fine print – Review the loan agreement carefully before signing. Check for any fees and the loan’s early payoff policy.
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Make payments on time – After consolidating, be diligent about making your new single monthly payment by the due date. Late or missed payments only undo benefits and damage your credit.
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Pay extra when possible – If you have wiggle room in your budget, consider paying above the minimum due. This saves on interest and pays the debt off faster.
Options For Getting A Debt Consolidation Auto Loan
You have choices when it comes to where to get a consolidation loan:
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Banks – Large national banks, local community banks and credit unions are go-to sources for auto loan consolidation. They offer competitive rates and flexible terms.
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Online lenders – Many reputable online lending companies cater to auto loan consolidation. They provide easy rate comparisons. Examples are LendingTree and PenFed.
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Credit cards – Balance transfer cards allow rolling multiple cards into one account. But card rates are higher, and you need enough credit limit to cover the total balance.
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Auto dealers – Dealers may offer new vehicle financing that lets you consolidate into the new car loan. But their interest rates tend to be higher.
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Current lenders – You may be able to consolidate with one of your existing lenders for convenience. Check if they offer better rates for current customers.
Shopping among multiple lenders ensures you find the best consolidation loan option for your situation.
Alternative Ways To Consolidate Auto Loans
Beyond taking out a traditional consolidation loan, you may also look at:
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Refinancing – If rates have dropped since you got your existing loans, refinancing them one by one could lower the rates without combining them into one loan.
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Using home equity – Tapping available equity through a home equity loan, HELOC or cash-out refinance can provide funds to pay off auto loans.
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Borrowing against assets – Options like securities-backed loans or taking a 401(k) loan can provide low-rate funds to pay off higher-rate auto debt.
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Using savings – If you have enough in emergency or other savings, you could pay off some loans completely and get lower monthly payments that way.
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Debt management plan – A DMP provided by a nonprofit credit counseling agency can negotiate lower interest rates on your behalf and coordinate payments.
Depending on your full financial situation, these other debt consolidation tactics may compare favorably to taking out an auto consolidation loan.
Weighing The Pros And Cons Of Auto Loan Consolidation
At this point, you hopefully have a solid grasp of what debt consolidation auto loans entail and how they work. To decide if consolidating is your best move, think over these key pros and cons:
Pros
- Lower interest rate to save money
- Single payment and due date
- Lower monthly payment through extended term
- Improve credit utilization for better score
- Pay debt off faster by reducing cost
- Simplify finances into one loan
Cons
- Closing accounts shortens credit history
- Credit checks from applications
- Higher total interest from longer term
- Temptation to pull cash out and add debt
- No benefit if can’t get lower rate
- Still have to commit to making payments
For many people struggling with high-rate auto
Pros and cons of auto loan consolidation
Knowing how to consolidate an auto loan with other forms of debt is one thing; deciding whether it’s the right move for you is another. To help you get started thinking, here’s a look at some pros and cons of consolidating auto loans.
| Pros | Cons |
|---|---|
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Streamlined repayment: Consolidating debts lets you combine multiple debt payments into one, which can make it easier to keep track of payment due dates and monthly payment amounts. Could save money: If you have a good or excellent credit score, you may be able to get a debt consolidation loan with a lower interest rate than your auto loan or other debts. Could boost credit score: Adding a new loan to your credit report can sometimes help to boost your score by improving your credit mix. |
Might not be as advantageous for bad credit borrowers: Borrowers with lower credit scores may have a harder time qualifying for debt consolidation loans and will likely face higher interest rates. Might have added fees: Most loans come with added fees that you’ll need to pay in exchange for the privilege of borrowing money. Won’t fix bad spending habits: As useful as it can be, debt consolidation loans won’t help you fix the problematic habits that led to you accruing debt in the first place. You also need to budget to pay off debt and practice smart spending habits. |
Shop around and apply
When you’re ready, shopping around for a loan can help you save money on interest charges and help ensure that you secure the best loan terms for you. The credit bureaus allow you a 14-day window to rate shop, during which all loan applications for the same type of product count as one inquiry on your credit report.
While shopping around, be sure to give each lender the same information. This will make it much easier to make an apples-to-apples comparison once you have all your loan offers in hand.
Once you’ve compared them all, you can choose the best offer and submit your official loan application.
How To Consolidate Car Loans With Credit Card Debt?
FAQ
Can you use debt consolidation for an auto loan?
Can I get debt relief for a car loan?
Does debt consolidation hurt your credit?
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.
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.
Should I consolidate my auto debt?
Debt consolidation may reduce your payments on your auto debt. Instead of paying the auto debt separately, it would be included with the rest of your loan payments. A debt management plan may help you organize your debts and plan out the payback, including that of your auto debt. Do You Qualify For Debt Relief?
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.