Debt consolidation can be helpful to many borrowers with multiple loans, and it could even save you money. Let’s cover how debt consolidation works, if consolidating your car loans makes sense, and when it could save you money in the long run.
What is Debt Consolidation?
Debt consolidation is when you combine your debt into one big loan, to put it simply. Many borrowers consolidate for the pure convenience of it. If you consolidate your debt together, instead of having multiple payments to worry about each month, you only have one. Borrowers often do this to make it a little easier to stay on top of finances, because there may be less of a chance of something falling through the cracks.
Consolidation and refinancing are often compared, and it’s because they’re pretty similar, but consolidation requires at least two debts to combine. You can try for an auto loan consolidation. If you’re approved, the consolidation lender pays off both loans, and you start a new loan which is the total of both previous loan balances with one interest rate.
If you have more than one auto loan, it may be possible to consolidate them together and only end up with one car payment. But whether or not it saves you money comes down to details of those car loans.
Consolidation of Auto Loans
Borrowers that consolidate typically do so to make their loans more manageable. And, you may end up saving money if you combine your car loans. However, it largely depends on your interest rate, loan balance, and loan term.
Auto loans are almost always simple interest loans, meaning you’re charged interest daily based on the remaining balance of your loan. If you have a long loan term and a high interest rate, it can mean paying a lot while you’re financing your vehicle. If you choose to consolidate, though, you could try for a lower interest rate and save money than if you were to keep the loans separate.
Before you run off and combine your auto loans, it might be a good idea to use a car loan calculator and/or amortization schedule of your existing loans. Using these tools, you can see how much interest you’re going to pay by the end of the two car loans separately.
To fully compare your overall cost of keeping your car loans separate vs. consolidating them, you may have to actually apply for loan consolidation to see what interest rate you qualify for. Then, compare the total cost to keeping the loans separate.
Interest rates for debt consolidation loans can get pretty high, and they vary wildly. Debt consolidation loans can have interest rates anywhere between 7% to 36%, depending on your state and credit score. There are some loan consolidation lenders that do approve borrowers with lower credit scores (below 660), but keep in mind that the better your credit score, the better rates you’re likely to qualify for. If your credit reports are in rough shape, you may struggle to qualify at all.
Consolidating Not for You?
If you find that consolidating your car loans isn’t right for your situation, but you still want to save money, refinancing your car loans may be more your speed.
Refinancing is replacing a loan with a new one, and most times, it’s done to get a lower monthly payment. Refinancing typically requires a good credit score – but often refinancing lenders will accept yours if it has improved since you started the original loan.
Or you could consider trading in one of the cars for something more affordable.
If you’re struggling to make ends meet the way things are right now, it’s a good idea to fully do your research on which option is right for you. And, avoiding a loan default and vehicle repossession should be a top priority since that can mean devastating damage to your credit score.
If you think that trading in one of your vehicles for something more affordable is the way to go, then let us help at CarsDirect. We’ve cultivated a nationwide network of dealerships that are signed up with lenders for borrowers in many unique credit situations. Start by filling out our free auto loan request form, and we’ll look for a dealer in your local area!