Are you paying off multiple cars at different times of the month? Here’s why you should consolidate car loans into one easy monthly payment and how to start.
The outstanding auto debt that Americans owe stands at a total of $1.2 trillion as of the start of 2020.
Many Americans are sinking in consumer debt, and a significant chunk of it lies in auto loans. While debt is not necessarily bad if you know how to use it, circumstances can, at times, put you in a vulnerable position. Thus, you must figure out how you can work your way out of sticky auto debt situations.
If you are facing multiple car debts, here is a rundown of how you can consolidate car loans to end up with only one monthly payment.
What Is Debt Consolidation?
Debt consolidation is where you combine several high-interest loans into one lower-interest one. When you consolidate your debts, you get access to lower interest rates and even lower monthly payments in some cases.
While consolidating your debt will not wipe it out or reduce the amount you owe, it will make it easier to manage the process. Some of the debts you can merge include auto loans, medical debt, payday, and student loans.
How to Consolidate Car Loans
If you have several vehicles you are paying loans for, then merging these debts into one is useful as you will only be handling one payment per month. When you want to get an auto consolidation loan, the vehicles are what will act as the collateral for it.
Let’s look at what you need to acquire such a loan:
- Gather the Information
Identify all the outstanding auto loans you have and know the balances on each. You can then begin your search for potential lenders.
To make your work easier, you can use an online loan calculator to give you an idea of the potential terms and rates you can get on the total amount you need to borrow.
- Have Your Proof of Income
For most lenders, six months is the ideal period that can make them comfortable enough to advance you a debt consolidation loan. If you have been employed for longer, it’s still an attractive signal for them as it can portend good creditworthiness.
Put together the last six months of your bank statements (if your pay comes in via direct deposit) or pay stubs to verify your employment income.
- Insurance
You have to identify the insurance that will cover all the vehicles which you plan to pay for using the auto consolidation loan. Talk to specialists, such as the insurance doctor, to help you get one insurer that can give you discounts on multiple vehicles.
If you are already dealing with one insurer but different policies for each vehicle, schedule a meeting with them to discuss merging coverage.
- Residency
Every lender, when assessing your creditworthiness, will look for a stable residency. The longer you have been a resident at an address, the better your profile with a lender.
If you move homes often, it may make a lender nervous even if you have an adequate debt to income ratio. Therefore, when applying for an auto consolidation loan, aim to have at least six months’ worth of utility bills from the same residency.
- Check Your Credit History
Contact all three credit bureaus to find out your credit standing, as each will have a different number. If you don’t have excellent credit, you can still access an auto consolidation loan, but your rates won’t be as favorable.
One reason checking your credit history is essential is the need to identify any inconsistencies. If such inaccuracies exist on your credit report, chances are high you will get turned down for debt consolidation.
As such, you should first look to resolve any inaccuracies before making the application.
- Apply
Once you have checked all the above boxes, you can fill out applications. Research various lenders for the terms that each can give you and select the best three. Apply to each of these three potential lenders and go with the one that will offer the best feedback for you.
With the funds you will receive from the auto consolidation loan, you can pay off the outstanding debt. From there, you will only be paying one monthly installment over the agreed period.
Tips to Consolidate Your Auto Debt Successfully
Consolidating your auto debt successfully isn’t automatic just because you can qualify for the loan. There are things you need to put into consideration for you to receive the benefits of auto debt consolidation.
- Be Realistic With Your Budgeting
If your debt restructuring plan is to work, it needs to be supported by a budget that appreciates your current realities. Only then can you develop a clear and relevant strategy for attack.
Your budget will account for the debt as well as other things, such as emergency funds and retirement contributions. You will need to go a step further and orient it to avoid incurring further debt.
Costs such as car registration that occur irregularly should also be a part of your budget to avoid escalating your liabilities.
You should also leave some room for ‘fun’ spending even as you work on a budget ‘diet.’ That’s because if you only focus on cutting down costs, you will eventually give in to the need for a big splurge, which can derail your budgeting and debt consolidation.
- Talk to Consolidation Professionals
If you are not sure of how to merge your auto loans, then reaching out to a loan consolidation service can help you make a plan. By using such a firm, you can break down what seems like a massive debt pile into manageable steps to get a handle on your position.
- Be Ready to Alter Your Financial Habits
Once you decide consolidating your debts is a must, you also need to accept the need to spend money differently. Depending on your context, this might mean scaling down on certain things so that your budget can work, or maybe giving up on some things altogether.
Unless you commit to new spending habits that can support managing the consolidated auto loan, you will still end up with more debt.
Take Control of Your Debt
Many Americans use auto loans to buy their vehicles. However, some circumstances can make an erstwhile well-thought-out debt utilization plan go awry, ending up in multiple auto loans. In such cases, you can consolidate car loans into one monthly payment that can potentially have cheaper rates.
Are your personal finances in need of shaping up? Check out more of our content for actionable insights and ideas on how you can make better use of your personal finances.