America has a heavy car habit. Our average household owns 1.88 cars, which means that most homes have more than one vehicle sitting in the driveway. And since roughly 85.5% of cars have some level of financing, an awful lot of people also have more than one car loan.
Combining or consolidating those loans into one that’s more manageable can be an attractive prospect. If that sounds like something you’d be interested in, here’s what you need to know about how to consolidate car loans and whether or not you should.
Why Should You Consolidate Car Loans?
Consolidating car loans involves taking out a new loan, using it to pay off two or more old loans, and paying off the new loan.
The most obvious benefit of consolidating your car loans is that you’ll reduce the number of monthly payments you have to manage. Keeping track of several creditors and due dates can be annoying, so cutting that number down to one is a lot more convenient.
However, there are many other (and often more significant) reasons to think about consolidation. For example, you may want:
- Smaller Monthly Payments: When you consolidate, you may be able to reduce your new monthly payment, which can be a lifeline to people struggling to afford their bills.
- Lower Interest Rate: A consolidation could get you an interest rate lower than the average rate of your existing loans, especially if the prime rate has gone down or your credit score has gone up.
- Earlier Debt-Payoff: It’s possible to use consolidation to get out of your auto debt much sooner than you would otherwise, especially if you’re willing and able to pay a little more each month.
These are some of the best reasons to consolidate, but they’re not the only ones. Maybe you also want to release a cosigner or save some money over the life of your loan. Just make sure you know the implications of pursuing those goals.
There’s Always a Trade-Off
Unfortunately, a loan consolidation loan can’t help you reach all of those goals. As you may have noticed, several of them are contradictory. Chasing one will always cost you in other ways.
👉 Here’s an example:
Imagine that you have two car loans with balances of $4,000 and $6,000. They have interest rates of 7% and 9%, respectively. If you continue paying as you are, you’ll be out of debt in two years.
However, your credit score has gone up significantly since you first took out those two car loans. If you were to consolidate, you could qualify for a loan with an interest rate of 5%.
However, all of the consolidation loans you find have repayment terms of at least three years. The upside is that you’d have a smaller monthly payment. The downside is that you’d be in debt a year longer and give interest more time to accrue.
There will always be trade-offs like that, so be crystal clear about your objective with your consolidation.
👉 See for yourself: Use our debt consolidation calculator to see the implications they have on your liabilities.
When Should You Consolidate Car Loans?
So far, we’ve focused on the benefits of consolidating your car loans. There are plenty, but even if it sounds like the answer to all of your car loan-related prayers (which I’m assuming are legion), you shouldn’t pursue it without doing your due diligence.
To determine whether you should consolidate your car loans or not, ask yourself these questions:
- How good is your credit? Has it gone up? Could you qualify for a great deal on a card or loan, especially one with a lower interest rate?
- Can you keep up with your monthly payments? If you can’t keep up with your monthly payments because of their number or balances, then it might be a good idea to consolidate (and sooner than later).
- Can you safely get out of your current loans? Some car loans have a hefty prepayment fee. Consolidation involves paying your existing loan early, and a prepayment fee could cancel out any gains you’d make.
These questions will help you consider all of the possible effects of loan consolidation. If your answers indicate that consolidating would be beneficial and feasible for you, gather more detailed data on your creditworthiness. Confirm what loan terms you can reasonably expect to get.
You can get a free copy of your Experian credit report and your FICO Score 8 (the most popular credit score) from the Experian website. If you want to get the other two credit reports plus your VantageScore 3.0, you can get all three for free at Credit Karma.
📘 Learn More: Not sure if debt consolidation is the best strategy for your car loans? Take a look at our guide to some of the other debt-relief options out there: Debt Relief Options: Which One Should You Use?
Where to Get a Consolidation Loan
If you decide that you want to consolidate your car loans, there are plenty of options out there for you. There are several different account types that you can use and several thousand providers out there.
These are the types of accounts you can expect to find and some good places to look for them:
- Consolidation Loans: These are the traditional tools for combining auto loans. They’re installment loans whose proceeds you can use to pay off your existing loans. PenFed is a federal credit union with competitive rates. They’re a solid place to start for people with fair credit and smaller loan balances. If you have a much higher outstanding balance (above $35,000), LightStream might be a better option.
- Balance Transfer Credit Cards: Balance transfer cards follow the same general structure as consolidation loans. Pay off the old loans with the card, then pay off the card. The benefit to the cards is that some of the best have a brief period (between one and two years) of no interest. The Citi Diamond Preferred Card and the BankAmericard Credit Card are both strong examples.
If you have the credit and the equity in a property to qualify for one, you can even use a home equity line of credit (HELOC) to finance your loan consolidation.
☝️ Whichever accounts you eventually decide to apply for, remember that each application represents a hard inquiry. Too many can lower your credit score.
It’s always a good idea to apply to more than one lender and see who offers the best deal. If you’re going to apply to multiple loans, do them all at the same time. The credit bureaus have a short grace period during which several hard inquiries may count as one. The exact details vary between scoring algorithms, but the window is at least two weeks, so submit all your applications within that window so the credit bureau can see that you are shopping for a loan.
How to Consolidate Car Loans
Finally, let’s summarize everything with a step-by-step guide.
1. Define Your Goal
First, clearly define the desired outcome of your consolidation. That should include both the positive results you’re looking for and the price you’re willing to pay in exchange.
2. Assess Your Credit
Once you have a tangible goal or two that define success for your consolidation, you have to figure out if they’re achievable. The first step to doing that is to assess your creditworthiness. Gather your FICO Score 8, your VantageScore 3.0, and all three of your credit reports.
3. Shop Around
Once you have a good understanding of your creditworthiness, figure out exactly what level offers are on the table for you. At this point, you should be able to gauge whether or not consolidation is a practical solution in your situation.
If there are accounts you think would be accessible with your credit score, beneficial to you in a meaningful way, and profitable after accounting for fees, make a list and gather what you need to apply for them.
4. Apply Sparingly and Quickly
Don’t apply to the first viable option until you finalize your shortlist of desirable accounts. Remember, you may only have a two-week grace period to get all of your hard inquiries in without causing damage to your credit score. Research all of the accounts you want to apply to ahead of time so you’ll be that much faster when the clock starts.
5. Execute Your New Payoff Strategy
Consolidating your car loans represents a significant shift in your debt paydown strategy. Make sure that you can (and do) follow through on your new approach, especially if it’s to pay off your balance during a limited promotional period.
The last thing you want is to spend time and money on your transfer, then miss a payment. That can cause a spike in your interest rate and harm your credit. If you used a balance transfer card to consolidate your loans your interest-free promo period could be canceled. Stay disciplined and make all of your payments on time and in full going forward.
Consider Carefully Before Committing
If you’re struggling to keep up with your car loan payments, debt consolidation can be an effective strategy. It’s not the only one out there, though, so don’t rush into it. Consider carefully before committing to one, as they can be expensive.
If the reason you can’t keep up with your car loans is that you don’t earn enough money or you overspend, consolidation is unlikely to help much. Focus on mastering the fundamentals instead. Earn some extra income or tighten your budget.
When in doubt, reach out to a local credit counselor for some free advice!