When paying off multiple car loans becomes a burden on both your time and your money, auto loan consolidation sounds like an appealing proposition. After all, you can consolidate your credit card or student loan debt for more favorable rates, so why not do the same with your auto loan debt? Auto loan consolidation allows you to merge two auto loans into one monthly payment, ideally with a lower overall interest rate. In some cases, auto loan consolidation can be advantageous, but there's a reason it's not as common as other kinds of debt consolidation. Consolidating two auto loans will only work to your advantage in a few specific scenarios. We'll cover what those look like and help you weigh the benefits against the risks before moving forward. 

Auto Loan Consolidation Benefits

two cars in garage
Consolidation can make your car loans easier to manage and lower your interest rate.

Managing the process of paying off just one vehicle can be a hassle, and paying off two vehicles every month can cause even greater stress. Having two monthly payments (especially if they're spread out over the month) can put you at a higher risk of forgetting a payment and falling behind. One benefit of consolidating your two car loans into one is that it simply makes it easier to manage payments when you only have to worry about one monthly payment instead of two. 

If you're having a hard time keeping up with payments due to high interest rates on one or both cars, you may be able to get a better interest rate if you consolidate your auto loans. Unfortunately, consolidating the two auto loans won't automatically guarantee a lower rate. If your credit score has improved since you took out the initial loan or the national interest rates have dropped, you may be able to take advantage of a lower rate when you consolidate the car loans. 

According to Go Banking Rates, credit agencies consider the consolidation of two auto loans into a new loan the same as paying off those existing credit accounts. The new consolidated loan will appear as a new credit account, but the accounts for the old loans will be positive. This can provide a springboard for your credit score to get you into a good or excellent range. 

Auto Loan Consolidation Risks

car loan consolidation risks
Beware, you may end up with a higher overall monthly car payment.

Before applying for auto loan consolidation, it's important to consider the drawbacks and risks along with the benefits we covered above. The first factor to consider is that many lenders won't approve auto loan consolidation and others will only approve under some conditions. Most banks will only approve car loan consolidations for people who can qualify for prime rates and won't accept those with bad credit. If you're underwater on one or both car loans, or your credit doesn't fall into the good or excellent range, your consolidation will likely not be approved. 

The primary reason to consolidate your auto loans is to get a better interest rate but that lower rate is not guaranteed. You may end up wasting your time applying for consolidation only to find you get no monetary rewards for all your efforts. In fact, extra fees may end up bringing up the total cost of the loan consolidation to be higher than the individual car loans. Finally, extending the loan terms in the process of consolidation can cause you to overpay for the vehicles over the life of the loan.

Is Auto Consolidation for You?

calculating car loan consolidation

If you have significantly improved your credit score since you purchased the vehicles or the national interest rates have dropped, consolidating your car loans may be the right decision to get a lower interest rate. If the convenience of having just one monthly payment is appealing to you, consolidation can be the solution. You should note that the value of the vehicles will play a large role in determining if consolidation will be an option. The value of one car must be high enough to cover the remaining loan balance for both car loans. 

Before you proceed, you should evaluate if one of the alternatives to consolidating your car loans will be a better solution:

  • Refinance the auto loans individually or choose to refinance the loan with the higher interest rate. Refinancing is a more common way to improve your rates or loan terms and you'll have an easier time finding lenders who can assist.
  • For more urgent financial situations, you may have to look into selling one of your vehicles and using the funds to pay off the second vehicle. This method will only work if you have positive equity in the vehicle and its value is high enough to cover the remainder of the loan.

No matter if you go with auto loan consolidation or refinancing, make sure you have a thorough understanding of the new auto loan rates and terms so that you land in a better situation than where you started.

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