What to Know About Auto Loan Debt Consolidation

What Is Auto Loan Debt Consolidation?

Debt consolidation is the process of using a new loan to pay off multiple debts, which may include an auto loan.

While there's no specific loan you must use to consolidate auto debt, standard consolidation options include personal loans, home equity loans, home equity lines of credit (HELOCs) and balance transfer credit cards.

The goal of debt consolidation is to combine multiple monthly payments into one, preferably with a lower interest rate than what you're currently paying.

Auto Loan Debt Consolidation vs. Refinancing

Although they share similarities, auto loan debt consolidation and refinancing are two different options you can pursue with your car debt.

The primary difference is that debt consolidation allows you to pay off multiple debts, while auto loan refinancing involves replacing just your auto loan with a new one, preferably with better terms.

Consolidation may be worth considering if:

• You have multiple high-interest debts you want to pay off.
• You want to minimize the number of loan applications you submit.
• You want to combine all of your monthly payments into one.
• You can get better terms with a consolidation loan.

Refinancing may be worth considering if:

• You're only interested in tackling your auto loan debt.
• You want to consolidate other debts separately.
• You can get better terms with an auto refinance loan.
• You want to tap some of your vehicle's equity through a cash-out refinance loan.

Ways to Consolidate Auto Loan Debt

If you're thinking about consolidating your auto loan along with other debts, here are some potential options you can compare.

Personal Loan

A personal loan is a type of unsecured debt. Depending on which lender you choose, you may be able to borrow up to $100,000 and make payments over one to seven years.

There's no minimum credit score required to obtain a personal loan, but individual lenders have credit criteria you'll need to meet to be eligible. Also, you'll typically need a good credit score to qualify for a low interest rate. You'll usually have to pay fees, as well; origination fees can range from 0% to 12% depending on the lender and your creditworthiness.

Because personal loans typically don't require collateral, you don't have to worry about the lender repossessing your car or foreclosing on your home if you can't keep up with payments. That said, they tend to charge higher interest rates than auto refinance loans and other types of consolidation loans.

Learn more: How to Get a Personal Loan: A Step-by-Step Guide

Home Equity Loan

If you're a homeowner, a home equity loan allows you to tap some of the equity you have in your property.

Loan amounts can vary depending on the lender you choose and how much equity you have. In general, though, lenders limit you to a combined loan-to-value (CLTV) limit of 80% to 85% between your home equity loan and primary mortgage loan. Repayment terms can range from five to 30 years, and closing costs can range from 2% to 5% of the loan amount.

Because they're secured by your home, home equity loans often offer lower interest rates compared to personal loans. However, if you default on your payments, the lender may foreclose on your home.

HELOC

Like a home equity loan, a HELOC allows you to tap some of the equity you have in your home. However, HELOCs are a type of revolving credit, giving you a credit limit you can draw from, pay off and borrow from again—similar to a credit card.

You'll typically get a draw period of up to 10 years, during which you may be able to make interest-only payments. After that period expires, you'll get up to 20 years to pay off the remaining balance plus interest. Closing costs can range from 2% to 5% of the loan amount.

Also, unlike personal and home equity loans, HELOCs typically offer variable interest rates, which can fluctuate over time. Also, if you can't make payments, you may face foreclosure.

Learn more: Home Equity Loan vs. HELOC: What's the Difference?

Balance Transfer Credit Card

In general, credit cards charge higher interest rates than most forms of debt. However, balance transfer credit cards offer an introductory 0% APR promotion, allowing you to consolidate and pay off debt interest-free over a period of 12 to 21 months.

You can also generally expect an upfront balance transfer fee of 3% to 5% of the transferred amount.

That said, the ongoing APR after the promotional period expires can be high. Also, you won't be able to see your credit limit until after you've been approved and opened your account. So, there's a possibility that you won't be able to consolidate all of your debt. As a result, it's best to consider this option only for smaller debt balances.

Pros and Cons of Auto Loan Consolidation

As with any financial decision, it's important to consider both the advantages and disadvantages of auto loan consolidation before pulling the trigger. Here's what to keep in mind.

Should I Consolidate My Auto Loan?

Consolidating an auto loan and other debts can make sense if you want to combine all of your monthly payments into one and the new interest rate works in your favor. Depending on your situation, though, it could make sense to pursue other options:

• Refinancing: Refinancing your auto loan can be a good idea if you can qualify for better terms compared to a debt consolidation loan or if you want to access some of the equity in your vehicle.
• Hardship plan: If you're struggling to keep up with payments, consolidation can remove the risk of repossession. However, if your credit needs some work, you may benefit more from getting on a hardship plan with your lender.
• Selling the vehicle: If you could benefit from a lower monthly payment, selling or trading in the vehicle for a less expensive model could be your best option.

How to Consolidate Auto Loan Debt

If you've decided that consolidation is right for you, here are some steps you can take to accomplish your goal:

1. Check your credit score. Register with Experian to get free access to your Experian credit report and FICO^® Score^☉. These resources can help you evaluate your credit health and pinpoint areas you can address if needed.
2. Gather documentation. Some consolidation options may require more documentation than others. Depending on your choice, gather the documents you'll need before you start applying.
3. Shop around. It's best to get prequalified or preapproved with at least a few lenders to get a sense of what your loan terms might look like. This process can also help you ensure that you get the best possible deal.
4. Submit an application. Once you decide on a lender, submit an official application. The underwriting and funding process can vary depending on the type of loan you choose. Once you're approved, however, it's important to review the loan agreement before accepting the terms.
5. Transfer the debt. After you're approved, go through the process of transferring your debt. This may involve asking your new lender to pay off your other loans directly or using funds deposited into your bank account to pay them off. In either case, it's crucial that you continue making payments on the original debts until you've confirmed they're paid in full.

The Bottom Line

Auto loan debt consolidation can be a useful strategy for simplifying your finances and potentially lowering your interest rates, but it's important to weigh your options carefully. Whether you choose a personal loan, home equity loan, HELOC or balance transfer credit card, it's important to weigh the benefits and drawbacks.

It's also important to consider potential alternatives, such as refinancing, getting on a hardship plan or selling your vehicle.

Before moving forward, evaluate your credit, compare lenders and ensure the new loan terms align with your financial goals. Also, continue to monitor your credit to stay on top of your efforts to build and maintain a good credit score throughout the process.