At Addition Financial, we are always happy to provide our valued members with the opportunity to save money–and that includes auto loan consolidation. The good news is that there are multiple ways to consolidate debt from auto loans if you want to pay off your car loans and take advantage of a better interest rate or lower monthly payment. With that in mind, here are the 4 best ways to consolidate your auto loan debt.
Let’s start with the basics, which is whether it’s possible to consolidate car loan debt. The short answer is yes, but let’s talk about what it looks like.
The process of debt consolidation involves taking outstanding debt that’s due to more than one creditor and doing one of two things:
The main benefit of car loan debt consolidation is that it often translates to a single monthly payment that’s lower than the total of the payments before consolidation, with a lower interest rate and the potential to get out of debt more quickly.
Another benefit is that after paying your car loans, you’ll own your cars outright since your original loans will be paid in full and your car won’t be used as collateral. This sets auto loan consolidation apart from refinancing, where you still have a loan that uses your vehicle as collateral.
As we mentioned above, there are multiple ways to consolidate auto loan debt. Here are 4 of the best ways to pay off your existing car loans.
The first option to consolidate auto loan balances is to take out a personal loan. Personal loans have no restrictions on how you can spend the money. They may be secured or unsecured. If you qualify for an unsecured loan, you don’t need collateral to get the money. However, you should be aware that unsecured loans pose a higher risk to lenders and may have comparatively high interest rates when viewed side-by-side with a secured loan.
Some of the things that may be used as collateral include savings accounts, CDs, investment accounts, insurance policies, vehicles and homes.
Personal loans typically have closing costs between 1% and 8% depending on the lender. You’ll need to keep that in mind when you apply because you’ll need to pay the closing costs up front. For example, if you needed a $30,000 loan to pay off your car loans, you could pay anywhere from $300 to $2,400 in closing fees, although many personal loans have fees that are on the low end of that spectrum.
A home equity loan is a loan that uses your equity in your home as collateral. That makes it a secured loan. Most lenders require homeowners to have a minimum of 20% equity in their home to borrow against it. Because your home is acting as collateral, you should know that if you default on a home equity loan, you won’t need to worry about your vehicles being repossessed. However, there’s a risk that you could lose your house in a foreclosure.
As a secured loan, a home equity loan may have a significantly lower interest rate than what you would get with an unsecured loan. In most cases, the closing costs for a home equity loan are between 2% and 5% of the loan amount and must be paid up front.
One of the benefits of choosing a home equity loan is that you have the option of taking cash out if your equity permits you to do so. There’s the potential that you can consolidate your car loans and pay some credit card debt, make home improvements or invest money in a college fund.
A home equity line of credit, HELOC for short, has a lot in common with a home equity loan. To qualify, you’ll need at least 20% equity in your home and that equity serves as collateral for the line of credit. The closing costs are also in line with those for a home equity loan and usually total between 2% and 5% of the credit line’s limit.
Many of the same risks associated with home equity loans apply to HELOCs, as well. Because your home equity acts as collateral, there’s a risk that you could lose your home to foreclosure if you default on your payments.
The biggest difference between a home equity loan and a HELOC for auto loan consolidation is that with a HELOC, you pay only for what you borrow. You might have a $50,000 line of credit but need only $25,000 to pay off your car loans. If you borrowed only $25,000, you would pay interest on that amount and not on the full $50,000.
You would also have the option of withdrawing additional funds up to the limit to use for other purposes, since there are no limitations on how you can use HELOC funds.
Using a credit card to consolidate auto loan debt isn’t the most popular option, but it may be the right one for some people. The process works in the same way it would if you were consolidating credit card debt. You would apply for a balance transfer credit card with a low introductory rate and transfer your balance to the card. Going forward, you would make payments on the credit card and you would own your car outright.
There are a few potential obstacles with this method. The first is that some lenders won’t allow you to transfer funds to a credit card. Many require payment with cash, a check, a money order or an ACH transfer. Some lenders will allow you to obtain a balance transfer check and use that, while some may allow a direct transfer to the credit card of your choice.
There are fees associated with balance transfers as well, and they are typically in line with home equity loans and HELOCs, ranging from 3% to 5% of the transferred amount.
The biggest concern with using a credit card to consolidate your auto loans is that most credit cards offer a low introductory rate that expires after a specified period. By law, the introductory period must last at least six months but some cards offer introductory periods of 12 to 18 months. You’ll need to read the terms and make sure that you understand what will happen to your interest rate if you still have a balance after the introductory period ends, because you could end up paying a higher rate than what you were paying on your original car loans.
Each of the four auto loan consolidation options we’ve mentioned has its pros and cons. Here are some pointers to help you choose the option that makes the most sense for your circumstances:
By comparing the rates and terms, including total costs, you can narrow your choices and ultimately, select the auto loan consolidation method that’s best for you.
If you have two or more auto loans, then consolidating your auto loan debt may be a good option to help you reduce your monthly payments and save money with a lower interest rate. The 4 methods we’ve explained here represent the easiest ways to pay off those loans and get to an affordable monthly payment.
Are you considering auto loan consolidation? Addition Financial Credit Union is here to help! Click here to read about our competitive personal loans and begin the application process today.