Can You Combine a Car Loan & Personal Loan? (w/ Guide)

At Addition Financial, we often speak to our members about debt consolidation and its benefits and risks. One of the things that we are asked is about what types of debt can be consolidated, specifically:

Can you combine a car loan and personal loan with debt consolidation?

The short answer is yes. In this guide, we’ll share the details and provide you with the steps required to consolidate a car loan and personal loan into a single, new loan.

Can You Include a Car Loan in Debt Consolidation?

When we see articles about debt consolidation, they’re almost always referring to credit card debt. While there’s no denying that credit card debt is an issue for many Americans, it’s not the only type of debt that can be consolidated.

Car loan consolidation is an option and can be extremely useful for people who have more than one auto loan, as is often the case in households with two adults and children who are of driving age.

Depending on a variety of factors, your car loan payments may be higher than you want them to be:
Your credit score was lower than average when you bought one or more of your vehicles.
You opted for a high interest rate dealer loan.
Your financial situation and credit score have improved since you bought your car(s).

If any of these things apply to you, then consolidating your auto loans can help you save money by qualifying for a low interest rate and a lower monthly payment.

Car loan debt consolidation may be done with a personal loan, a home equity loan, a home equity line of credit or even with a balance transfer credit card with a low introductory rate. Each of these options has its advantages and disadvantages, but they’re all potentially available to you if you want to consolidate your car loans.

Can You Combine a Car Loan and Personal Loan?

Now, let’s get to the question we asked at the beginning: is it possible to combine a car loan and a personal loan with debt consolidation?

The answer is yes. Debt consolidation can be used to consolidate various types of debts, including credit card debt, car loans, personal loans and even certain types of student loans.

There are some differences between car loans and personal loans. The biggest is that car loans are always secured, using the vehicle as collateral. That means that the vehicle may be repossessed if the borrower defaults on the loan. Personal loans may be secured or unsecured, but either option is eligible for debt consolidation.

Why Would You Combine Car and Personal Loans?

Combining a car loan (or more than one) with a personal loan might make sense for a variety of reasons. Here are some of the potential scenarios where loan consolidation might make sense:

Your credit score has improved. Lenders use credit scores to determine your interest rate. If you applied for one or all of your loans when your credit score was lower than average, you almost certainly didn’t get the best interest rate available. If your credit score has changed, then loan consolidation can help you save money with a lower interest rate.
Multiple loan payments are a source of stress. Paying bills can be stressful under the best of circumstances, and you may feel less anxious if you have fewer monthly payments to make.
You want to pay down your existing debt. With a lower payment and lower interest rate, you may be able to pay down your existing debt more quickly after consolidation.
You’re confident you’ll be able to make on-time monthly payments on your new loan. Debt consolidation is not a good idea if you're not in a solid financial position that will allow you to make on-time payments going forward.

Debt consolidation may not be the best option if your credit score is lower than average and you’re working to rebuild your credit. You are unlikely to qualify for the best available interest rate and that may translate to higher debt in the long run.

What Debt Consolidation Options Are Available to Combine a Car Loan and Personal Loan?

There are four potential options that you can use to consolidate a car loan with a personal loan, each with its benefits and risks:

Personal loan. Personal loans generally range from $5,000 to $50,000. As we stated above, these loans may be secured or unsecured. Unsecured loans typically have higher interest rates than secured loans because the lender takes more risk when there is no collateral.
Home equity loan. A home equity loan uses your home equity as collateral. These loans are typically available to homeowners who have at least 20% equity in their homes. They carry a risk that the home could be foreclosed on if the borrower defaults on the loan. The advantage is that the money may be used for anything, including debt consolidation.
Home equity line of credit. A HELOC is a form of revolving credit that uses your home’s equity as collateral. As is the case with a home equity loan, there’s a risk that you could lose your home to foreclosure if you default on your loan. The benefit is that you can repay a HELOC and borrow again for the duration of the withdrawal period and you pay only for what you borrow.
Balance transfer credit card. A balance transfer credit card typically comes with a low introductory rate that lasts for a minimum of six months but may last as long as 18 months. It’s a form of revolving credit, which is also true of a HELOC, so using it for debt consolidation will impact your credit mix and may temporarily lower your credit score.

The use of a balance transfer credit card is the least common option because it may not be a good idea if you can’t pay your entire transferred balance before the introductory period ends. In most cases, the interest rate will change to a variable rate and there’s a possibility you could end up paying more in the long term than you would have without consolidation.

Guide to Consolidating a Car Loan and a Personal Loan

Now, let’s look at the steps required if you want to consolidate a car loan and a personal loan.

Calculate Your Total Payments and Request Payoff Amounts

The first step is to calculate your total remaining payments on your existing loans. You’ll need this information to compare with the total cost of your new loan. At this time, you should also contact your lenders and request a payoff amount. Keep in mind that your payoff should include a prepayment penalty if one was written into your loan contract.

Review Your Credit Reports

Before you apply for a new loan, we recommend requesting free copies of your credit reports, which you can do at AnnualCreditReport.com. You should review your reports and contact the credit bureaus if there are any errors.

Choose a Debt Consolidation Method

Assuming your credit report is accurate and your credit score is good, the next step is to choose a debt consolidation method. Personal loans are available to everybody, but if you own a home and have at least 20% equity, you may want to consider a home equity loan or HELOC. A balance transfer credit card is also an option, but we recommend it only if you have the means to pay your debt within the introductory period.

Research Lenders

Research lenders to determine which offer the best debt consolidation loans. You’ll often find lower rates and more advantageous terms if you choose a credit union instead of a bank. Choose those with the best terms for your short list.

Apply for Loans

Once you’ve narrowed your choice of lenders, it’s time to apply for loans. Keep in mind that while your credit score will take a small hit of between five and 10 points for a hard credit inquiry, you won’t be penalized for multiple inquiries provided they take place in the 14-day shopping period.

Choose a Lender

Select the lender with the best rate and loan terms for consolidation. You should keep in mind the interest rate, total amount due when compared to your original loans, the length of your loan term and whether there are early repayment penalties involved. We should mention here that each consolidation method comes with fees. With a loan, you’ll need to pay closing costs and balance transfer cards charge a transfer fee for each balance.

Close on Your Loan and Pay Old Loans

Finally, you’ll close on your new loan and use the proceeds to pay your old loans. In the case of a new loan, you’ll present your new lender with payoff letters and they will remit payment on your original loans. With a balance transfer card, you may not be able to transfer balances directly. Some credit card companies will accept a balance transfer check, but some will not.

If having multiple loan payments that include a personal loan and one or more car loans is a source of stress, then you may want to consider consolidating these multiple loans into a single, new loan with a lower payment and interest rate. We hope you’ll use this guide to walk through the process.

Are you considering loan consolidation to combine a car loan and personal loan? Addition Financial Credit Union can help! Click here to read about our personal loan options and start the application process today.