New vehicle loans have hit a record high of $31,099, with used vehicle loans following closely behind averaging $19,589. If you’re struggling with auto debt, one way to simplify your repayment plan and potentially save money is by combining your loans. Also called debt consolidation, combining loans typically happens in one of several ways with the main goal of streamlining multiple payments into one as a solution for how to pay off debt.
Some auto lenders allow you to combine two or more car loans into one while maintaining the loan’s secured status. If you do it right, consolidating your loans can reduce the number of payments you have to make each month, decrease your overall monthly payment amount, and slash your interest charges.
But it’s important to know what you’re getting into before you start.
Can You Include a Car Loan In Debt Consolidation?
Yes. If you have more than one auto loan, you can combine them into one using a specialized auto consolidation loan, home equity loan, or unsecured personal loan.
Here’s Why You Would Want To
- You have more than one car payment with different due dates and want the relief of having one payment to keep track of
- Your current interest rate is high and you may be able to lower it
- Your current monthly payment is high and you may be able to lower it
- Your credit score could use a boost
Consolidating Car Loans With an Auto Lender
If you’re wanting to combine more than one auto loan into a new one, it’s possible to do so with an auto consolidation loan. Before researching your options, it’s good to learn how consolidation works and the pros and cons associated with each particular loan type. Here we’re considering auto loan consolidation.
You can take cash out. Combining multiple car loans into one can give you the chance to get some cash out of the new loan. This process is called cash-out refinancing and typically includes taking out a loan that’s larger than the original loans and taking the difference in cash. This should be done with caution but can be helpful if you have some short-term cash needs without any other options.
It can help you escape being underwater. If you have one car loan that’s underwater — the loan amount exceeds the value of the car — and another with plenty of equity, you may be able to combine the two to create one loan that has net equity.
Keep in mind, though, that you’ll have a tough time consolidating them if both cars are underwater or if the positive equity in one car isn’t enough to make up for the negative equity in the other.
You could lose both cars if you default. If you default on a secured auto loan, the lender has the right to repossess the collateral to pay off what you owe. If your car loans are kept separate, defaulting on one will only result in the repossession of one car.
But if you have two cars under one loan, the lender could feasibly repossess both, making your situation worse.
It requires a lot of information. As with any car loan, you need to provide a lot of information to get approved. “You'll need to provide proof of income, have a stable residency history, and your vehicles will need to have up to date insurance as well,” says personal finance expert, David Bakke.
You’ll also need to provide details about your current loans and information about the vehicles. Because of all the documentation requirements, getting a car consolidation loan can take more time than you might want to spend. And if your vehicles are too old or have too many miles, you could be denied.
You may not save money. There’s no guarantee that the terms on the new loan will be more favorable than what you’re currently paying, says Bakke. “Although that is also the case with other forms of debt consolidation,” he adds.
Consolidating Car Loans With a Home Equity Loan
If you own your home and have significant equity in it, you can use a home equity loan to pay off your existing car loans. You can get a home equity loan from your existing mortgage lender or through a different one. That said, getting a home equity loan can come with its own challenges.
You’d own the cars free and clear. Since the collateral on a home equity loan is your house, your cars will no longer be tied up as collateral. This means that you won’t have to worry about your cars getting repossessed if you default.
It reduces your car insurance requirements. Auto lenders typically require certain levels of insurance on your car to protect their collateral. Once you own the car free and clear, however, you just need to make sure you comply with state minimums.
Of course, it’s still a good idea to have sufficient coverage in case you need it. But you’ll have more flexibility over what you choose and can save money on your monthly premiums.
You can combine your car loans with other loans. Mortgage lenders typically don’t have a lot of restrictions on how you use your loan funds. So if you have car loans, credit card balances, and other debts, you may be able to combine all of them into one loan to simplify things and get out of debt faster.
You could lose your home. Just as you can lose your car if you default on an auto loan, a mortgage lender can foreclose on your house if you stop paying your home equity loan. Since losing your home is usually worse than losing your car, you’re taking on more risk by involving your home equity.
Closing costs can be expensive. Closing costs on a home equity loan average between 2% and 5% of your loan amount. If you’re consolidating $30,000 worth of car loans, for instance, you can expect to pay $600 to $1,500 up front. Depending on the situation, these costs can neutralize any savings you get from scoring a lower interest rate.
You may not have enough equity. Most mortgage lenders limit how much you can borrow using a home equity loan. For example, you may be required to maintain at least 20% equity between your primary mortgage and any equity loans.
If you don’t have a lot of equity, you may not qualify for a big enough loan, if at all.
Consolidating Car Loans With a Personal Loan
As long as your credit and income are in good shape, you may have a good chance of getting a good interest rate on a personal loan. There are, however, other factors to consider that aren’t as prevalent with auto consolidation and home equity loans.
It converts it to an unsecured debt. Personal loans are typically unsecured, which means you won’t lose your car or your home if you default. There will, however, be credit and financial consequences if you stop making payments. They just might not be as bad as losing shelter or transportation.
It reduces your car insurance requirements. As with a home equity loan, a personal loan eliminates the need to use your cars as collateral. Without a lender setting minimum requirements for your car insurance policies, you get more flexibility with your coverage.
Your chances of getting a lower interest rate are low. There are several factors that go into determining your interest rate, but typically, secured loans offer lower interest rates than unsecured loans because the collateral reduces the risk the lender is taking on. As a result, it could be tougher to score a lower interest rate on a personal loan than you might get on another car loan or a home equity loan.
You could end up with a shorter repayment period. In general, personal loans tend to offer shorter repayment periods than car loans. Where a repayment period of five, six, or even seven years is standard with auto loans, personal loans tend to max out at seven years.
A shorter repayment period could increase how much you pay each month, even if you get a lower interest. For example, let’s say you have a five-year auto loan of $20,000 with an interest rate of 18%. Your monthly payment would be $507.87.
If you replace that with a consolidation loan with a 12% interest rate and a three-year repayment term, your payment will jump to $664.29.
How Consolidating Car Loans Affects Your Credit
In general, consolidating car loans using any of these options won’t have a big impact on your credit. While you’ll likely get a hard inquiry for applying for the new loan, that generally takes less than five points off your FICO credit score.
If you consolidate car loans without adding more debt to the mix, your amounts owed won’t change. Even if you take on more debt, it likely won’t change much unless it increases your debt-to-income ratio too much.
Consider Refinancing Your Car Loans Instead
An alternative option is to refinance your loans instead. Whether you have just one car loan or multiple, it may be simpler to refinance the loans separately.
While doing this won’t streamline your monthly payments, you can potentially get a lower monthly payment and interest rate without putting your house on the line. Many auto lenders offer car refinance loans but be sure to research and read the fine print before agreeing to it.
What to Do if You Have Bad Credit
If your credit hasn’t improved since your first took out your loans or it’s gotten worse, your options to consolidate car loans will be limited. While many lenders specialize in helping people with bad credit consolidate debt, their interest rates can be high, which could end up costing you more in the end.
One option is to get a cosigner to apply with you. By adding someone with good credit to the loan application, you’re decreasing the risk for the lender, which could result in a lower interest rate.
Alternatively, you can try to put a large down payment on the consolidation loan or borrow less than you need and make up the rest in cash. Again, decreasing the loan amount reduces the amount of risk for the lender, and you may get a lower interest rate in return.
Choosing the Best Option For You
If your credit is in good shape or you have a cosigner who has a solid credit history, there are several ways you can consolidate car loans. No single option is best for everyone, though, so it’s important to know how to choose the right one for you.
The most important thing to do is to do the math for each option. Some personal and auto lenders will allow you to get prequalified and see rate offers, making it easier to crunch the numbers. Bakke recommends getting quotes from at least three lenders to compare.
Also, consider your credit situation. Because auto and home equity loans are secured, you can still generally get a lower interest rate than you could with a personal loan, even with bad or fair credit.
The Bottom Line
“[Car loan consolidation] gives you more time to pay off your loans,” says Bakke, “and also makes it easier to keep track of your debts.”
Consolidating car loans can get complicated if you’re not careful, though, so it’s important to understand your options before you make any decisions. In addition to considering ways to consolidate car loans into one new one, also think about refinancing them separately. Depending on the situation, doing that could prove simpler than trying to combine them.
Whatever you do, make sure you understand the costs of the options you’re looking to pursue, and compare them what you’re currently paying. The best option will almost always be the one that keeps more money in your wallet.