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How to Consolidate Your Auto Loans

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Auto loan consolidation is when you use a new loan to pay off two or more car loans. You might consolidate in order to lower your interest rate, pay less each month for your cars and improve your credit score. Then there’s the convenience factor: The same way borrowers consolidate other forms of debt such as credit cards, student loans or personal loans, you could replace multiple car notes with just one loan payment, most likely a personal loan.

Car loan consolidation isn’t as common as refinancing, which may also lower your interest rate and payments but doesn’t help you streamline payments.

Reasons to consolidate your car loans

As with any debt consolidation, the main goal of combining car loans is to make payments simpler to manage. Perhaps you also want to:

  • Lower your APR.
  • Pay less each month.
  • Improve your credit score.
  • Get cash out from your new loan.

You may want to consolidate your car loans in order to access a little extra cash through a cash-out refinance. This is when you take out a new loan for more than the value of the car(s). It may seem like a good idea if you’re short on cash or face an emergency, but you’ll increase your debt and risk owing more on your loan than the car is worth.

Reasons not to consolidate your car loans

Increasing your overall debt is one of the biggest risks to combining car loans. You may be able to lower your monthly payments, for example, but still owe more in the long run.

You could end up with a higher APR

The interest rate and fees a lender charges are based on many factors and a lender may offer a similar or higher APR than you currently have on your auto loans, particularly if your credit score has slipped. You want to avoid taking on higher APRs, so it’s important to shop around for the loan you want.

You might pay more in interest overall

Look at the total amount of interest you would pay over the life of the loan. If you take out a longer-term loan, your monthly payment may drop, but it may amount to greater total interest charges over time even if you are able to obtain a lower APR.

You may not qualify

If you are looking to refinance rather than combine auto loans, and you’re already upside-down on your auto loans, you’ll have to make enough payments to be right-side up before you can refinance.

This isn’t to say you can’t combine two car loans into one, or that you shouldn’t refinance; rather that it requires serious due diligence to make sure it’s right for your needs.

How to consolidate auto loans

Step1. Identify your current loan terms

Before you start consolidating auto loans, you need to find out how much you owe on those loans and if there are any penalties for paying them off early. The total amount would then help determine how much your new loan should be. For each car loan, you’ll want to find out your current:

  • Loan balance
  • APR
  • Monthly payment

Call your lender(s) or log in to your online loan account(s) to see what lenders call your payoff balance. A payoff is how much money it would take to completely pay off your loan. It’s not the same thing as principal because the payoff amount includes interest and fees.

Ask for a payoff quote

Most lenders will provide what’s called a 10-day payoff. This is because a loan’s payoff amount will change over time as interest accrues and as you pay it down. A 10-day payoff is exactly what it sounds like: a loan payoff quote that’s good for 10 days. After that, if you want an accurate quote, you would need to contact the lender again as the amount may have gone up or down slightly.

Step 2. Check your credit score

As we mentioned earlier, one idea behind consolidating auto loans is to take advantage of lower interest rates. But if your credit score has dipped since you took out your car loans, you may find higher APRs instead. Check your credit score to see where you stand. Credit score may be more — or less — important depending on which type of loan you choose.

Step 3. Choose the best loan type for your situation

It’s important to keep in mind that you can only have one auto loan per vehicle. However, different types of loans could be used to combine auto loans:

  • Personal loans. You could use a personal loan to pay off multiple types of debt at once.
Pro: No limits on how you spend the money. Cons: APRs might be higher than a secured loan.
  • Home equity. A home equity loan or a home equity line of credit (HELOC) could provide a large maximum borrowing amount that could be used to consolidate debt.
Pro: With real estate as collateral, your APR will likely be relatively low. Con: You risk foreclosure of your home if you default on the loan.
  • Credit cards. Though some lenders allow you to pay off a car loan with a credit card, be cautious when considering this option.
Pro: Easy and convenient, assuming your lender accepts credit cards. Con: Potentially high APRs plus the risk of maxing out your card.

Read more about the pros and cons of debt consolidation options.

Step 4: Gather documents

Depending on the type of loan you’re seeking, you should be ready to provide:

  • Personal details such as your name, address, Social Security number, phone number and email address.
  • Income and employment details such as pay stubs, a W-2 or 1099 form, bank statements, and your employer’s name, address and phone number.

Step 5: Shop around and apply

The credit bureaus allow at least a 14-day window for consumers to rate-shop. This means it won’t hurt your credit to apply to multiple lenders any more than it would to apply to one, as long as you complete all applications within two weeks. Some credit-scoring models may allow up to 45 days.

Potential lenders could include your local credit union, a national bank or an online lender. Apply to several to obtain offers that you can then compare.

Step 6: Choose a new loan and pay off the old ones

After you compare loan options, choose one by contacting the lender and finalizing the paperwork. The lender may transfer funds to the other lenders directly or send you a check for you to use and pay off your auto loans. Don’t forget to set up payments on your new, consolidated loan. If you don’t choose automatic payments, calendar reminders can jog your memory before the due date.

How consolidation impacts your credit score

Paying off your old loans and reducing the number of payments you make each month could make those payments easier to track and pay on time. If you’ve had trouble making on-time payments in the past, new habits could boost your score. If you’re able to take any savings from your new loan and apply them to revolving debt such as credit cards, you could also reduce your credit utilization ratio, which might help boost your credit score. Credit utilization ratio is your current debt in relation to your credit limits. A low credit utilization rate is a sign to lenders that you can manage your repayments responsibly.

Alternatives to an auto loan consolidation

If you’re considering combining two car loans into one, it makes sense to rule out other options first before going through with the auto consolidation. You could instead:

Auto loan consolidation vs. auto loan refinance

Auto loan consolidation effectively combines two or more auto loans into one different type of loan. But that new type of loan might not be the best fit. Maybe you don’t have home equity to tap or don’t want to. Unsecured loans are another option, but their APRs may be high, making them a more expensive choice.

Refinancing your auto loans could offer a lower APR (and/or different terms) without shopping around for a new lender. Though not all lenders allow it, some refinance their own loans. The downside, of course, is refinancing each vehicle separately, leaving you with the multiple car payments you wanted to drop. This takes consolidation off the table, but it might save you money or offer a different type of flexibility.


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