9 Pros & Cons of Consolidating Auto Loans

Car loans are usually necessary since most people don’t have enough cash on hand to purchase a vehicle outright. However, there are downsides to some car loans, particularly dealership loans which may come with higher-than-usual interest rates and unfavorable terms. If that sounds familiar, one option may be consolidating auto loans.

At Addition Financial, we help members with big purchases and ongoing expenses, and that includes advising them about car loan consolidation. If you’re wondering whether it makes sense to consolidate your car loans, here are 9 pros and cons to consider.

What is Car Loan Consolidation?

Car loan consolidation is a process where a car owner takes out a new loan. After the loan has been funded, the car’s owner uses the proceeds of the new loan to pay off their existing car loan, usually at a lower interest rate than the original loan.

It’s possible to consolidate car loans in a variety of ways. We should note that consolidating car loans is not the same as refinancing a car loan. Refinancing involves taking out a new car loan at a lower rate. Car loans use the vehicle itself as collateral while a car loan consolidation loan may be secured or unsecured.

Some of the loan types that may be used for car loan consolidation include the following:

Personal loans
Home equity loans
Home equity lines of credit
Credit cards

The main reason to consolidate your car loans is to save money on interest. If your credit score has improved since you bought your car or if you have multiple loans at different interest rates, then consolidating your car loans may be a good idea.

How Does Car Loan Consolidation Work?

Before we reveal the pros and cons of car loan consolidation, let’s walk through the steps of consolidating your car loans, so you understand how it works.

Get Your Loan Payoff Amounts

Whether you have one or multiple auto loans, the first thing you’ll need to do is request the payoff amounts for your existing loans. You’ll need this information to determine how large your consolidation loan will need to be.

You should also check your existing loans for prepayment penalties, since you’ll need to pay those at the same time you pay your loan balance. They should be included in your payoff amount but it’s your responsibility to confirm.

Choose a Loan Type

The next step is to choose a loan type for consolidation. There are several options, each with their benefits and risks:

Personal loans typically are unsecured, meaning that your vehicle can’t be repossessed if you miss payments. You’ll own your car free and clear. The biggest potential downside is that unsecured loans usually have higher APRs than secured loans.
Home equity loans are secured by your equity in your home. They typically have low APRs and longer terms than personal loans. The downsides are that you could lose your home if you default on your loan and closing costs may be high when compared to personal loans.
HELOCs are also secured by your home equity. There are no restrictions on how you can use the money and your car won’t be repossessed, although your home could be foreclosed on if you default. Closing costs may also be high.
Credit cards often have higher APRs than loans. The benefits of consolidating your car loan with a credit card are convenience, since it takes far less time to charge your credit card than it would to apply for a loan, and the lack of a set prepayment term. Downsides are that your credit score may be impacted and you’ll most likely need to pay a balance transfer fee.

You should consider all ramifications of each loan type before you make your decision.

Gather Documents and Required Information

If you’re applying for a loan of any kind, you’ll need to be sure you have the required documents and information at hand. These may include the following:

Your personal information, including your address, Social Security Number, and contact information.
Employment information, including your employers name, address, and telephone number as well as your most recent pay stubs.
Tax information, including a W-2 or 1099 forms and/or copies of your most recent tax returns if you’re self-employed.
Bank and investment account statements.

Getting this information together ahead of time will lead to a smooth application and underwriting process.

Shop for a Lender

You have a shopping window of 14 days to apply for loans, which means your credit score won’t be penalized if you apply with several lenders. You will take a minor hit to your score for one hard credit inquiry, but you can apply as many times as you choose.

Take this opportunity to complete applications and compare rates and loan terms to choose the option that’s best for you.

Apply for Your Consolidation Loan and Pay Your Car Loan

The final step is to choose a lender and apply for your new debt consolidation loan. Keep in mind that the underwriting process may take some time.

After your closing, you can use the funds from your new loan to pay off your existing loan. At that point, you’ll have full ownership of your vehicle(s) and will make monthly payments on your new loan.

9 Pros and Cons of Car Loan Consolidation

Here are the pros and cons of car loan consolidation as we see them.

Pros of Consolidating Car Loans

There are significant upsides to consolidating your car loans, as follows:

Depending on how much equity you have in your car(s) and what your credit looks like, you may be able to borrow extra money to take cash out to use for other expenses. Since there are no restrictions on how to use money from personal loans or home equity loans, you could use the money to pay down credit card debt, invest for retirement or fund a family vacation.
You may be able to improve your financial situation. For example, if your family has two cars and you’re upside down (meaning the loan amount is higher than the value of the car) on one, you may be able to combine what’s owed on the two loans to get a single loan that puts you in a better financial position.
You’ll own your car(s) outright. However you consolidate your car loans, your vehicle(s) will not be used as collateral. That means you’ll own them outright and they cannot be repossessed if you default on your loan.
You may end up with a monthly loan payment and interest rate that are lower than what you have on your existing loans, particularly if you’ve been paying for your car with a high interest dealer loan.

Cons of Consolidating Car Loans

Here are some of the potential downsides of consolidating your car loans:

You might not be able to qualify for a consolidation loan if your credit score is lower than average or if you’re upside down on your loan. In these cases, your best bet would be to keep making timely payments on your existing loan to see if you can improve your chances.
There are up-front costs associated with every consolidation option for your car loans. You will pay closing costs between 2% and 5% if you opt to consolidate your car loans using a home equity loan or a home equity line of credit. Closing costs for personal loans may be as low as 1% or as high as 8%, depending on the lender. You should expect to pay a balance transfer fee if you decide to consolidate your car loan with a credit card.
Depending on your credit score, you may end up with a higher APR than what you had on your car loan.
If you opt for a longer term personal or home equity loan, you may end up paying more in total even if you have a low interest rate, since the interest rate will be applied over a longer loan term.
There may be prepayment penalties in some cases. You’ll need to be sure to read the fine print to make sure you understand your responsibilities.

For many car owners, the pros outweigh the cons, but you’ll need to keep your specific circumstances in mind as you weigh your options.

Is Car Loan Consolidation Right for You?

Consolidating auto loans may not be the right choice for everybody, Here are some signs that you should consider car loan consolidation:

You took out a dealership car loan with a high interest rate and you want to lower it. (The same thing applies if your credit score was less than ideal and you couldn’t qualify for a low rate with a credit union or bank.)
You have multiple auto loans with different due dates and lenders and you want the peace of mind of having a single car payment to make each month.
Your current monthly payment(s) are too high for comfort and you believe that auto loan consolidation can help you pay less.
You have a handle on your spending and you’re not worried that consolidating your loans will lead to overspending in other areas.

If any of these things apply to you, then it’s possible that car loan consolidation could help you lower your monthly payments and save money.

Consolidating auto loans can help you qualify for a lower interest rate, take full ownership of your vehicles, and save money in the long term with lower payments. Comparing the 9 pros and cons we’ve listed here will help you decide if auto loan consolidation is right for you.

Are you looking for an affordable way to consolidate your auto loans? Addition Financial Credit Union can help! Click here to read about our personal loans and begin the application process today.