Car Loan Refinance vs. Consolidation: How to Decide

Our Addition Financial members often come to us with questions about car loan refinance vs consolidation, and they want to know how to decide which option is best for them. While there’s no one-size-fits-all answer, having the pertinent information about how each option works and how each can impact your financial situation is a must. Here’s what you need to know.

How Does Refinancing a Car Work?

Let’s start with car loan refinancing and how it works. Auto refinancing is the process of replacing your existing car loan with a new car loan, typically one with a lower interest rate and lower monthly payment than the original loan.

The process is the same as it would be for refinancing a mortgage. You provide the lender with detailed information about your finances and they evaluate your creditworthiness to determine whether you qualify for refinancing and what your interest rate will be.

You’ll need to provide proof of employment and compensation, as well as proof of any other income that you want to be considered as part of your ability to pay the new loan. Your lender will make a hard credit inquiry to review your credit history and score and provide you with a quote for your new loan.

Once the refinancing loan has been approved, you’ll schedule a closing. At the closing, the new lender will pay off the old loan amount and you’ll be responsible for monthly payments on the new loan going forward.

How Does Auto Loan Consolidation Work?

Auto loan consolidation works in the same way that credit card debt consolidation works. Simply stated, consolidation is a process that takes multiple debts and consolidates them into one new debt, usually with a lower interest rate and lower monthly car payment than the original debts.

If your family has two or more vehicles with outstanding loans, then auto loan consolidation can simplify the process of paying for your vehicles and save you money at the same time. 

There are four common ways that people consolidate auto loan debt, as follows:

  • Personal loans. A personal loan may be secured or unsecured, meaning that you may or may not need collateral to get one.
  • Home equity loans. A home equity loan is a secured loan that uses your equity in your home as collateral.
  • Home equity lines of credit (HELOCs). A HELOC is a secured line of revolving credit that uses your home equity as collateral.
  • Debt consolidation credit card. A debt consolidation credit card is unsecured and typically comes with a low interest rate for an introductory period of between six and 18 months.

Personal loans and home equity loans are both types of installment credit, which means you would be replacing one form of installment credit with another. HELOCs and credit cards are both forms of revolving credit, meaning you can repay them and borrow again. 

The process of debt consolidation is simple. After you have been approved for your new loan, line of credit, or credit card, you get payoff amounts from your auto lenders and use the proceeds from your consolidation to pay off the original loans.

Similarities and Differences Between Car Loan Refinance vs Consolidation

Before we share some tips to help you decide which option is right for you, let’s review the similarities and differences between refinance and debt consolidation.

The key similarities between auto loan refinance and consolidation are as follows:

  • Both options involve paying off your old car loan using new financing. You’ll either use the proceeds from your new car loan or a new alternative loan (or in some cases, a new credit card) to pay off the original loan.
  • Both options will have some impact on your credit because they both involve a hard credit inquiry and may impact your credit utilization and credit mix.
  • Both options provide the opportunity to qualify for a lower interest rate than your original loan and may translate to a lower monthly payment, as well.

Here are the key differences between consolidation and refinancing:

  • With refinancing, you’re still using your car(s) as collateral and there is the potential they will be repossessed if you default on your loan.
  • Requirements vary by lender, but you may not be able to refinance if your car has more than 100,000 miles. There are no mileage requirements for debt consolidation.
  • If you use your home equity to borrow, your car won’t act as collateral but your home will. That means that there’s a risk you could lose your home to foreclosure if you default on the loan.
  • Refinancing must be done one loan at a time while debt consolidation makes it possible to consolidate all of your car debt into one loan.
  • If you use a credit card to consolidate, you’ll have an introductory rate which may translate to short-term savings. However, if you don’t pay your balance within the introductory period, you’re likely to end up with a higher variable rate that can cost you more money in the long term, something that’s not a risk with refinancing and other forms of consolidation.

The choice comes down to a lot of factors, including your credit score and history, your personal preferences, and which risks you’re comfortable taking.

Benefits and Risks of Car Loan Refinance vs Consolidation

Here are some of the most important benefits and risks of car loan refinance and consolidation.

Benefits and Risks of Car Loan Refinance


  • Refinancing uses your car as collateral, so it may be easier to qualify for than a personal loan.
  • If your credit has improved or if you had a high interest rate loan, you can probably get a lower interest rate and lower monthly payment.
  • Refinancing won’t impact your credit mix since you’ll be replacing one installment loan with another.
  • You may be able to use cash out refinancing to capitalize on your equity in your car.


  • Your car could be repossessed if you default on your loan.
  • If your credit score is lower than average, you may not be able to get the best interest rate.
  • You’ll likely pay some fees, which may include an early prepayment penalty on your original loan and application and origination fees with your new lender. You may also need to pay fees to re-register your car.
  • Your credit score will take an initial hit thanks to the hard credit inquiry and the fact that a new loan will impact the average age of your credit accounts.

Benefits and Risks of Car Loan Consolidation


  • You can choose a variety of ways to consolidate your car loans, including personal loans, home equity loans, HELOCS and debt consolidation credit cards.
  • You can go from having multiple monthly loan payments to a single payment.
  • You can find options where you’ll pay a lower interest rate and have a lower combined monthly payment than what you had originally.
  • You may not need to provide collateral for a consolidation loan.


  • Consolidating your loans will likely have an initial negative impact on your credit score because it may change your credit mix and affect the average age of your credit accounts.
  • If you choose an unsecured loan, the interest rate is likely to be higher because the lack of collateral increases the lender’s risk.
  • If you use home equity to consolidate, either in the form of a loan or a HELOC, your home will serve as collateral and could be foreclosed on if you default.
  • Debt consolidation credit cards can cost you more in the long term because after the introductory period, your interest rate will increase.

auto loan refinancing quiz

Which One is Right for You: Car Loan Refinance or Car Loan Consolidation?

The answer to the question of which option is best for you depends upon your individual circumstances. 

If you have a single vehicle and your credit score has improved since you bought it–or if you financed your car with a high interest dealer loan–then refinancing may be the best option. You’ll get a lower interest rate and lower payment and in most cases, refinancing is relatively easy to qualify for since you’ll have equity in your vehicle and the vehicle will serve as collateral for the new loan.

On the other hand, if you’ve got multiple car loans and you’ve been frustrated with having multiple monthly payments, consolidation can take a lot of the stress out of paying for your cars by providing you with a single monthly payment.

The key to deciding is to weigh your options and then, apply with several lenders to compare rates and terms. Ultimately, the option you choose should provide you with a lower interest rate and a lower monthly payment. 

Finally, we want to note that if you’re someone who’s working to build or rebuild your credit, you may want to hold off on doing either of these things and focus on making on-time payments to improve your score. If you have a lower than average credit score, you may not be able to qualify for the best interest rates and refinancing or consolidating could cost you more in the long run.

If you believe your car loan payments are too high, then car loan refinance or car loan debt consolidation may be right for you. You can use the information we’ve provided here to help you choose the best option for your specific circumstances.

Are you looking to save money on your current car loan? Additional Financial Credit Union can help! Click here to learn about our auto loan refinancing options and apply today.

The content provided here is not legal, tax, accounting, financial or investment advice. Please consult with legal, tax, accounting, financial or investment professionals based on your specific needs or questions you may have. We do not make any guarantees as to accuracy or completeness of this information, do not support any third-party companies, products, or services described here, and take no liability or legal obligations for your use of this information.