Car Loan Consolidation: What You Must Know

Car loan consolidation could help you have fewer monthly payments or meet other financial goals.

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When you look at your finances, you may feel like optimizing your loan payments could help your situation. Consolidating your debt could leave you with fewer or more conveniently timed payments each month if you have multiple debt payments. One way to do this is through car loan consolidation.

What Is Car Loan Consolidation?

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 Consolidation Differs From Refinancing

Consolidating a car loan is different than refinancing your car loan. When you refinance an auto loan, you usually take out another car loan to accomplish your goal of a lower interest rate or lower monthly payment. Banks secure these loans using your vehicle, which gives the lender a way to recoup some of the money owed through repossession if you don't make payments. This may result in lower interest rates than unsecured loans.

Some car consolidation loans are unsecured, which means lenders take a bigger risk lending you the money. To reflect this risk, unsecured car consolidation loans may have higher interest rates than a car refinance loan. This means you may pay more in interest with a consolidation loan than with auto loan refinancing. However, car consolidation loan borrowers may have other goals than achieving a lower interest rate or a lower monthly payment. For instance, you may be looking to have fewer monthly payments overall.

How to Consolidate a Car Loan

The process of consolidating a car loan is straightforward. First, figure out what type of loan you want to use to consolidate your car loans and any other debt you want to consolidate. This may be a personal loan, credit card, home loan, or home equity line of credit. You may also have other options depending on your situation.

Once you decide on the loan type you want to use and have a loan lined up, you need to request a payoff quote for any car loans and other loans you wish to consolidate with your new loan. This gives you the total amount of money you need to consolidate the loans you want to pay off. The new lender may directly pay off your old loans or give you the money to pay the loans off yourself.

Either way, verify that all your old loans are paid in full before you stop making payments. Otherwise, you may pay late fees or other fees if the payoffs don't go through when you expect.

A car loan consolidation example:

Let's say you have two $10,000 car loans. You decide you want to consolidate using a home equity loan to stretch out the monthly payments over a longer period of time. First, you'd apply for a home equity loan and get approved for the loan amount you need. To determine this, you should ask your lender when you expect to close on the loan. Then, request a payoff amount from both of your car loan lenders based on that date. Once the loan is approved, use the funds to pay off both of your old car loans.

Requirements for a car consolidation loan

Requirements for a car consolidation loan depend on the type of debt you use. That said, here are some general requirements lenders look for:

  • A credit score that meets the lender's criteria

  • Sufficient income to repay the loan

  • A reasonable debt-to-income ratio to sufficiently repay the loan

  • Ample assets to back the loan if using a secured loan

How to Consolidate Car Loans With Other Types of Loans

For most loans you use to consolidate car loans, you can often consolidate other loan types. Lenders don't necessarily care what variety of loans you consolidate, as long as you can get approved for the consolidation loan. You have many aspects to consider before consolidating several loan types together.

On the positive side, consolidating several loans could result in fewer monthly payments. If you have a high interest rate, you may be able to secure a lower rate. This is especially true if you use a home equity loan. Alternatively, you may be looking for an overall lower monthly payment across all of your debt. You could potentially accomplish this by taking out a longer-term loan.

Consolidating several loans into a single loan has risks, too. If you take out a home equity loan, missing a payment could result in foreclosure of your home. Unsecured loans could result in a higher interest rate or more interest paid over the length of a longer loan term. By consolidating your loans, you could potentially end up taking out more debt in the future. This could put you in a worse financial position.

It also commingles your debt. If you have several loans, you could pay off one loan before the others and lower your total monthly payment amounts. With a consolidated loan, you have to pay off the entire balance before the monthly payment goes away.

Benefits and Drawbacks of Consolidation

You could receive some (but likely not all) of the following benefits when you consolidate your car loan:

  • Fewer monthly payments
  • Lower monthly payments
  • Lower interest rates
  • More time to pay back your loan

Car loan consolidation has a few drawbacks to consider. Depending on how you consolidate your loans, you may experience several of these negative aspects:

Consider Whether Consolidation Is Right for You

Consolidating your car loans may make sense to help you achieve your financial goals. In some cases, you may want to consolidate other loans at the same time. Before consolidating, thoroughly investigate the pros and cons of all options before moving forward with the process. Once consolidated, you can't return to your previous loan arrangements.

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Lance Cothern
I started reading everything I could about personal finance while I attended college. It turns out that was one of the smartest decisions I could have made. Now, I want to share that knowledge with you. Using what I've learned through my education and experience, I aim to help you make informed decisions throughout the car buying and lending process while saving money at the same time.