Taking out a loan to pay off two or more car loans can help you save on interest and more easily manage your repayments. But not a lot of car loan providers offer this service. And you won’t benefit if your balance is too high.
What is car loan consolidation?
Car loan consolidation is a way to combine two or more car loans into one by taking out a new loan to pay off your current balances. Your new consolidation loan gives you one monthly payment, ideally with more favorable rates and terms.
It can be a great way to manage your repayments. But it’s not as common as other types of debt consolidation, like credit card and personal loan consolidation.
How to consolidate your car loans in 6 steps
Follow these steps to find a lender and apply for auto loan consolidation:
Step 1: Review your current car loans’ rates and terms.
Knowing what you already have is key to making sure you can qualify and that consolidating is actually a good deal. Check with your current loan providers for the following information:
Loan balances. Add up your current loan balances to get a rough idea of how much you need to borrow. There’s a chance you’ll need to borrow more if you consolidate before your next repayment — you’ll have more interest that hasn’t been paid off yet.
APR. Take the APR for each car loan and find the average. Ideally, you’re looking for a new APR below this average if your goal is to save.
Monthly repayments. Add up your monthly repayments. If you’re trying to reduce the cost, you’ll want to aim for a loan with a new rate and term that gives you monthly repayments lower than this amount.
Make sure you won’t pay extra
Car loan consolidation can cost you more if one of your current lenders charges extra for paying off your loan early. Look at your loan contract for any prepayment penalties.
Also, ask about how your interest is added up. If your loan comes with add-on or precomputed interest, it’s cheaper to stick with your current loan. Otherwise, you’ll end up paying interest on interest.
Step 2: Check your credit score and report.
Most lenders have a minimum credit score requirement that directly impacts the rate and terms you qualify for. You can get a free estimate of your credit score from many banks, budgeting apps and some websites — without affecting your credit.
If it’s lower than you thought, check your credit report for mistakes. You can request a free copy once a year from each of the three credit bureaus: TransUnion, Equifax and Experian.
Find a mistake? Reach out to the creditor to have it corrected before you apply for a loan.
Step 3: Compare auto loan consolidation providers.
Car loan consolidation isn’t as common as refinancing. Start your search with a wide range of lenders, like banks, credit unions, online providers and even dealerships if you’re thinking of buying a new car.
After making sure you can qualify, compare factors like rates, terms and loan amounts. If possible, prequalify with a few to get a more accurate idea of the offers you might receive.
Step 4: Fill out an application.
Follow the lender’s directions to complete the application. Generally, you’ll need to provide the following types of information:
Current loan balances
Current lenders’ names and contact information
Proof of income
Proof of registration for your cars
Proof of insurance on your vehicles
Proof of residency
Step 5: Pay off your current car loans.
In many cases, your new lender will reach out to your current providers and pay off your car loan balances for you. But there’s a chance you might have to handle this process yourself. Reach out to each lender to learn about the payoff process to get started.
Step 6: Start repayments on your new loan.
Follow the terms of your new loan to start making repayments. Consider signing up for autopay to make sure you’re never late.
Is consolidation the same as refinancing?
It’s not. Consolidation involves moving multiple car loans into one. Refinancing involves trading in your current car loan for a better deal. They can both help you save, though consolidation has an added benefit of better managing your monthly repayments.
5 reasons to consolidate multiple car loans
There are several ways you can benefit from auto loan consolidation, though these are the most common:
Manage your repayments. If you’re struggling with repayments due at an inopportune time — or just want fewer bills to keep track of — consolidation can fix both.
Get a better rate. Consolidation gives you the chance to get a lower interest rate on one or more loans, especially if your credit has improved.
Lower your monthly cost. Consolidating for a longer loan term can make your monthly bill better fit your budget.
Get out of debt faster. Consolidating for a shorter loan term saves on interest and moves up the date for when you’re debt free.
Avoid a trade-in. In some cases, you might be able to use consolidation to absorb your old car loan balance and buy a new car without trading in your old one.
When shouldn’t I consolidate?
Not everyone can benefit from consolidating their car loans. Here are a few situations where you might want to hold off:
Your credit score decreased. Having a lower credit score since you first borrowed often spells higher rates — if you can even qualify.
You don’t have steady income. You might struggle to qualify if you’ve recently lost your job or switched to freelancing.
Your balance is too high. If your combined car loan balance is higher than what most lenders offer, you won’t be able to consolidate.
You want to save, but already have long terms. In this case, combining your debt will give you a shorter term and higher monthly repayment.
You’re upside down on a loan. If your car is worth less than your loan balance, you might not qualify for a consolidation loan.
Can I consolidate with bad credit?
It’s possible to consolidate your car loans with bad credit — and might be a good move if you have a high-interest loan and your credit score has improved. But you won’t have as many options.
Dealership financing is generally off the table, though your bank might be willing to work with you if you’re currently in good standing. Otherwise, online lenders are generally your best bet, since they typically have more flexible eligibility requirements.
5 alternatives to auto loan consolidation
If consolidating your car loans isn’t the right choice, consider these options instead:
Auto equity loan. Some lenders like Wells Fargo let you borrow against the amount you’ve paid off on your current car loan to fund a new vehicle.
Personal loan. If your car loan is upside down, you can use a personal loan to pay off the balance without having to provide collateral.
Refinancing. You can save by trading in your high-interest car loan for a lower rate or better terms while keeping any good deals you already have.
Sell or trade in your car. If you don’t need two cars but want a new vehicle, these options let you use the value of your current vehicle to cut down the cost of a new car loan.
Tighten your budget. When your balances are too high for consolidation, cut back on spending to focus on paying down your debts so you can qualify in the future.
Car loan consolidation can help you save on interest and the monthly cost. It can also make it easier to manage your monthly repayments by folding them into one. But it’s not the right move if your credit score has decreased or your combined balance will give you repayments you can’t afford. In that case, you might want to refinance your car loans instead.
Frequently asked questions
Generally, not in the long term. Most lenders conduct a hard credit check when you take out an auto loan, which temporarily lowers your credit score. But if car loan consolidation helps you establish a record of on-time repayments, it can improve your credit in the long run.
No, rates and terms you receive through prequalification are only an estimate based on basic personal information. The loan offer you ultimately receive may be different after the lender runs a hard credit check and reviews your full application.
It’s possible — but it might not be a good idea. Car loans typically have lower rates than other types of loans, since they’re usually backed by collateral. If you move all of your debt under an unsecured loan, you could end up paying more in interest.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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