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    Are Auto Loans Eligible For Debt Consolidation?

    Damien Frost
    Damien Frost - 2020-01-07T22:00:00.000Z

    Debt consolidation is a financial strategy which involves taking out a fresh loan to combine and clear smaller loans.

    It is a good option that can be used for most debts and can be beneficial if you don’t have excessive outstanding amounts.

    If you have two or more cars financed by auto loans, applying for debt consolidation can help you access lower rates and even save money that would have otherwise been spent paying interest.

    As usual, the available APR depends on your credit score and repayment history. Still, the good news is that there are different options to choose from.

    What Is Debt Consolidation?

    In general, debt consolidation is paying off all smaller loans by taking out a fresh loan.

    It is mostly used for credit cards and other unsecured loans but works perfectly for other types of debts as well.

    Auto loan debt consolidation is like car loan refinancing given it also involves adjusting the terms of the ongoing loans for two or more vehicles.

    If eligible, you’ll get a fresh loan by consolidating all the current loans into one. This helps reduce monthly payments to just one.

    In most cases, the consolidated auto loan will also charge a lower interest rate than other auto loans.

    Can You Consolidate Auto Loans With Other Debt?

    Auto loans are secured loans. This means the lender that provided the financing has the right to repossess your vehicle if you default on payments.

    Besides this drawback, defaulting on a loan can also cause immense damage to your credit score.

    You can consolidate two or more auto loans, but you can’t consolidate auto loans with other unsecured loans.

    Because auto loan debt consolidation is meant for vehicles only, lenders don’t allow you to combine other loan types.

    On the other hand, if you wish to consolidate secured and unsecured debts into one, applying for a personal loan could be the best option.

    How Do You Consolidate Auto Loan Debt?

    While it is a novel idea, consolidation isn’t for everyone.

    Borrowers must consider this option only when the following criteria are met:

    • The total debts don’t exceed 40% of your income
    • You don’t have a plan to take out a huge loan in the near future
    • You have multiple car loans featuring high APRs and each has a different due date
    • You aren’t upside down on the loan (a situation where the loan amount is higher than the car’s value)

    You can consolidate car auto loans in two ways:

    1. Fixed-Rate Debt Consolidation – Pay back the new loan at a fixed rate over the agreed term
    2. Balance Transfer Credit Card – Transfer all ongoing debts into a 0% balance transfer credit card and pay back the entire amount during the card’s promotional period

    For example, imagine you have 2 outstanding loans – one for $12,000 at 11.99% APR and another for $8,000 at 14.99% APR. Currently you pay monthly interest of $345 and $425 on each.

    Technically, you owe $20,000 at a combined APR of 13.19%. The total monthly payment is $770 and it’ll take you 2.6 years to clear the debts.  

    Assuming you have a good FICO score, you can get a consolidation loan between 12% to 25% APR.

    Let’s say, you consolidate the balance for 2 years at 14%, you’ll still save $825 on interest.

    To get approved, you’ll need the current loan details, proof of income, proof of address, and proof of identity.

    Additional documents include proof of insurance and the vehicle registration certificate.

    What Are the Pros And Cons of Auto Loan Consolidation?

    The key benefit of consolidating multiple car loans in a newer loan is the likelihood that it offers an interest rate that is significantly lower than the original loans.

    Other attractive benefits of auto loan consolidation are as follows:

    • If you get a lower APR, you can save money on the interest. However, a lower rate directly depends on your FICO score and debt-to-income ratio.
    • When you combine all the loans, you’ll be paying one single payment every month. This reduces the chances of missing a due date.
    • Credit bureaus consider consolidation loans as new credit accounts. Once you pay off the existing accounts, they will be listed as positive and help increase the score.

    Notable drawbacks of consolidating auto loans include:

    • Not every lender offers this option.
    • The new monthly payments can be bigger depending on the APR and terms.
    • It could increase your debt-to-income ratio.

    Conclusion

    You should consider consolidating two or more car loans only if you are sure that you can handle the larger monthly payment.

    Before applying, check and compare the available rates and other options like auto loan refinancing.

    If you have a decent credit score and aren’t upside down on the existing car loans, consolidation can help you save a good amount, especially if the new consolidation loan terms are attractive.