Auto Loan Consolidation: What to Know
Janet Schaaf is a freelance writer, editor and proofreader who considers reader advocacy to be her calling. After taking a few roads less traveled, Janet completed a bachelor’s degree in English Literature from the University of Missouri-Kansas City, with English Department Honors. She has been correcting grammar and checking facts since she could string a sentence together. For the past three years, Janet has focused on making personal finance topics understandable and relatable. Loan terms and credit card agreements can look overwhelming, but understanding what you’re agreeing to is paramount in grasping the impact debt can have on your life.
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.
What is auto loan consolidation?
Consolidating debt means taking out a new loan and using the funds to pay off some (or all) of your existing debts. Instead of keeping track of multiple bills, you would have one simplified monthly payment. Auto loan consolidation is no different. In that case, at least one of the debts you’d pay off would be a car loan.
For reference, there’s no such thing as a dedicated auto consolidation loan. However, you can use debt consolidation loans or other financial products for this purpose, such as:
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.
How to consolidate auto 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:
1. Choose the right type of loan for you
Generally, you can only have one auto loan per vehicle. However, you can use other financial tools to combine multiple auto loans into one when necessary. Here’s a look at your options:
Personal loans
Most dedicated debt consolidation loans are a form of personal loan. A personal loan is a form of installment loan that typically comes with fixed monthly payments.
| Pros | Cons |
|---|---|
Few usage limits: You can use a personal loan to consolidate multiple forms of debt. You own the vehicle: Since personal loans are unsecured, the car can’t be repossessed. Stable monthly payments: Personal loans typically come with fixed rates, which can create a more stable repayment schedule. | Higher interest rates: Since personal loans are unsecured, they will likely come with a higher interest rate than a loan that requires collateral. Shorter loan terms: Sometimes personal loans can have shorter loan terms than other forms of financing. |
Home equity loan or HELOC
On the one hand, a home equity loan works like a personal loan. In this case, you’ll receive the funds in a lump sum and be expected to make regular payments on both the principal and interest. On the other hand, a home equity line of credit (HELOC) works more like a credit card. With this product, you’ll be able to borrow against your home equity as needed for a set period of time. You’ll also only pay interest on the amount that you’ve borrowed.
Both products use your home as collateral to secure the loan. In most cases, this can help you borrow money at a significantly lower interest rate. However, it also means that the lender can foreclose on your home if you’re unable to keep up with your payments.
| Pros | Cons |
|---|---|
Lower APRs: Loans with real estate as collateral may have lower APRs than other forms of financing. You own the vehicle: The lender won’t repossess your vehicle if you stop making payments. You can consolidate multiple debts: Home equity loans and HELOCs generally don’t have many usage restrictions. | Risk of foreclosure: The lender can repossess your home if you are unable to keep up with the monthly payments. High closing costs: Real estate loans come with closing costs, which can add to your total cost of borrowing. Equity required: You’ll need to have enough equity in your home to qualify for one of these loans. |
Balance transfer credit cards
Although some lenders may allow you to pay off your car loan with a balance transfer credit card, it’s best to proceed with caution. While many of these cards may come with a tempting 0% APR introductory rate period, those only last for 18 to 21 months at most. If you can’t pay it off before then, you may face higher interest rates than you would with another type of loan.
| Pros | Cons |
|---|---|
Convenient: Charging a purchase to your credit card is easier than applying for a loan. 0% APR period: If you can swing it, the 0% APR period can help you pay off your loan without accruing interest charges. Credit card rewards: Some cards allow you to earn rewards on your purchases. | High interest rates: Once the introductory rate period is over, your credit card will likely have a higher interest rate than other loan products. Raised utilization ratio: Putting a big purchase on your card will raise your credit utilization ratio, which can impact your credit score. Balance transfer fee: Most balance transfer cards charge an additional fee for each balance transfer you make. |
2. 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.
3. 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.
4. Close on the loan and consolidate your debts
After you receive loan approval, it’s time to close on your loan. Be sure to read the fine print of your loan agreement carefully and reach out to your lender if you have any questions before signing on the dotted line.
Use the funds to pay off your existing debts. It’s a good idea to set monthly payment reminders for your loan so that you remember to keep up with your payments. Alternatively, you could also consider enrolling in autopay.
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 |
|---|---|
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. |
Is auto loan consolidation right for you?
Truthfully, while auto loan consolidation can be a powerful tool, it’s not right for everyone. With that in mind, here’s some more information to help you determine whether this financial move is right for you.
When auto loan consolidation may make sense
Consolidating your auto loans might make sense if you’re currently juggling multiple debt payments and you’re having trouble managing them all. It’s easier to make sure one monthly payment is made on time than it is to keep track of multiple due dates and missing a payment by mistake.
It can also be a good idea if you have a strong credit score. You may be able to qualify for a better interest rate than you currently have, which can help you save money over time.
When auto loan consolidation may not make sense
Debt consolidation likely doesn’t make sense if you’re not ready to examine the habits that helped build the debt in the first place. Without changing your spending habits, there’s a good chance that you could continue to accrue more debt after consolidating your auto loan.
Likewise, if you only owe a small-to-moderate amount of debt, it’s typically a better idea to use other strategies, like the debt snowball or debt avalanche methods, to work toward repayment. In that case, you can avoid paying some of the fees that come along with taking out a debt consolidation loan and you’ll likely be able to repay your debts faster.
Finally, you may want to reconsider auto loan consolidation if you have a lower credit score. While there are debt consolidation loans for bad credit, the interest rates can sometimes be cost-prohibitive and you may end up paying more in interest than you would by sticking with your existing auto loan.
Frequently asked questions
Yes, it is possible to consolidate your car loans. However, since there’s no such thing as a dedicated auto consolidation loan, you’ll likely need to use another form of financing, like a personal loan, home equity loan or balance transfer credit card, in order to make it happen.
When you first pay off your existing loans and close the accounts, that can temporarily ding your credit score. But, if you’re diligent about making payments on time, consolidating your auto loans can actually help to improve your score by adding to your credit mix.
Different lenders will accept different credit scores. If you have a lower credit score, consider shopping for a debt consolidation loan for bad credit. However, be aware that the lower your score is, the higher your APR is likely to be.