By consolidating multiple car loans, you could secure a lower interest rate and/or a lower monthly payment, not to mention the convenience of streamlining multiple car loan payments into one.
There are a number of tools that you can use to consolidate your car loan, including personal loans, home equity loans, or refinancing your car loans into one loan. Here’s a closer look at how the process works and how to decide whether it’s the right choice for you.
Key Points
• Car loan consolidation involves combining multiple car loans into a single loan with a new lender, often to secure a lower interest rate and simplify payments.
• Lenders typically require a good credit score, stable income, and a clear understanding of your current debt.
• Consolidation can reduce monthly payments, lower interest rates, and simplify debt management by having one monthly payment.
• The process includes gathering financial documents, comparing offers from different lenders, and completing a loan application, which may involve a credit check.
• Consider any fees, such as origination fees or prepayment penalties, and ensure the new loan terms are more favorable than your current loans.
Can You Consolidate Car Loans?
You can consolidate debt, including car loans, by combining multiple loans under one new loan to streamline payments. Ideally, the new loan may also have a lower interest rate, which could save you money in the long run. Or, the new loan may have a better term that can help make your monthly payments more manageable.
Reasons to Consider Consolidating Car Loans
Reasons to consolidate your car loans include the ability to:
• Streamline monthly payments: If you have multiple car loans, keeping track of the different due dates can get overwhelming. Consolidation can streamline those payments into one monthly payment.
• Secure a lower rate: If average auto loan interest rates have fallen or your finances have improved, you may qualify for a new loan with lower interest. Consolidating your auto loans under this new loan could reduce the amount you pay each month, as well as the overall amount of interest you’ll pay over the life of your loan.
• Make monthly payments more manageable: Finally, if your monthly payments are too high, consolidating with a loan that has a longer term can lower your monthly payments. Be aware, however, that you will be paying interest for longer, which in some cases may increase the total cost of your loan.
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Steps for Consolidating Auto Loans
If you’re looking to consolidate your auto, here are the steps you’ll need to take:
1. Learn the Status of Your Current Loan
First, find out how much you still owe on your auto loans. Specifically, you’ll want to find out your 10-day payoff quote, which is the amount of money required to pay off your loans completely, including principal, interest, and fees, over the next 10 days. After 10 days, you’ll want to get a new quote from your lender.
You’ll also want to find out if your lender charges prepayment penalties for paying off your loan early. If they do, be sure the cost of these penalties doesn’t outweigh the benefits of consolidation.
2. Choose Your Loan Type for Consolidation
Next, you’ll want to choose what kind of loan you’d like to use to consolidate your auto loans. You have a number of options, including:
• Car consolidation loans: Some auto lenders will offer the ability to consolidate your auto loans into one auto loan that’s secured by your vehicles. While these loans can help streamline your bills, beware that if you miss a payment, your vehicles are in danger of being repossessed by your lender.
• Personal loans: Like auto loans, personal loans are a form of installment loan. However, unlike car loans, they are often unsecured and require no collateral. When consolidating with a personal loan, you’ll own your cars outright. Personal loans offer a lump sum of cash with few limits on how you use it. You agree to pay back the loan in monthly installments with interest.
• Home equity loans and home equity lines of credit (HELOCs): A home equity loan allows you to borrow money against the value you’ve built up in your home. These loans use your home as collateral and because they’re secured, they may offer lower interest rates than other options. However, if you fail to pay back your loan, you’re at risk of your lender repossessing your home. Meanwhile, a HELOC allows you to open a revolving line of credit backed by the value of your home. You can borrow up to a certain credit limit, and as you pay back the loan, that credit limit is restored.
Recommended: Personal Loan vs Auto Loan: What’s the Difference?
3. Gather Necessary Application Documents
Once you’ve established the type of loan you’re interested in, you’ll want to gather documents. Requested information is often similar to that of car loan requirements, such as personal identification and proof of insurance, residence, and income.
4. Compare Lenders and Apply
Shop around among various lenders to help ensure that you receive the lowest interest rate possible. You may even want to apply to multiple loans. Though a loan application will lower your credit score slightly, the effects of multiple applications during a short period are not cumulative, as the credit reporting bureaus want to encourage you to find the loan that’s right for your situation.
Pros and Cons of Consolidating Car Loans
Before committing to a loan, be sure to weigh the pros and cons of consolidation carefully.
Pros of Consolidating Car Loans
Here are some of the notable upsides of car loan consolidation:
• Consolidating can lower your interest rate and/or your monthly payments.
• Consolidation may also help build your credit score by decreasing your credit utilization, which is the amount of available credit that you currently use.
• Consolidating with an unsecured loan will mean that you own your cars outright, and don’t need to fear repossession if you miss a loan payment. That’s not to say there aren’t consequences for failing to pay an unsecured loan. Lenders will do what they can to recoup their losses, including sending the loan to a collections agency.
Cons of Consolidating Car Loans
On the other hand, consolidating your loan may have a host of disadvantages:
• You may trigger prepayment penalties, if your lender charges them.
• You could end up with a higher interest rate. This could end up happening if your credit score has slipped since you initially applied.
• If you extend the terms of your loan, you might end up ultimately paying more in interest than if you’d kept your original loans
Recommended: Debt to Income Ratio for Car Loans
Alternatives to Car Loan Consolidation
If you decide consolidation is not for you, you have a number of options.
Trade In Your Vehicles
You could potentially lower the amount you pay each month by trading in your vehicles for cheaper used car options at a dealership.
Sell Off One Car
Another option is to sell one of your vehicles. You could then use the money you make from that sale to help you pay off your other auto loan.
Auto Loan Refinancing
Another option is auto loan refinancing. When you refinance an auto loan, you take out a new loan to pay off one of your old loans. As with a consolidation loan, this new loan will hopefully have a lower interest rate or a longer term that leads to more manageable monthly payments.
Again, you’ll want to consider refinancing when interest rates have dropped or when your finances have improved, which can increase the chance you’ll receive a more favorable new loan.
Recommended: Pros and Cons of Refinancing a Car
The Takeaway
Debt consolidation and refinancing can be important tools to help you make your finances more manageable and save you money. Also, if either strategy helps you pay your debts on time, it’s a great way to be proactive in protecting your credit score, which can make securing future debt easier and cheaper.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Is it possible to consolidate auto loans?
Yes, it’s possible to consolidate auto loans by combining multiple loans into a single loan with one monthly payment. This may simplify finances and potentially lower the interest rate. However, eligibility depends on credit, income, and lender terms, and fees or extended loan terms could increase overall costs.
Can you refinance two car loans together?
Yes, you can refinance two car loans together through a process called loan consolidation. This combines both loans into a single loan with one monthly payment, which may simplify finances. However, eligibility depends on factors like your credit score, income, and the combined value of the vehicles.
Does debt consolidation affect buying a car?
Consolidating your loans may help build your credit score, which will help you secure future auto loans. It may also help you free up extra cash that you can use to purchase a new vehicle if you choose.
Photo credit: iStock/Jinda Noipho
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