The Effect Of Combining Car Loans on Your Credit Score

You may consider combining car loans if you have more than one in your household and believe you may find a better interest rate on a new loan. Consolidated car loans allow you to pay off two or more loans with a new loan, leaving you with one monthly payment. Anytime you modify a loan, however, there will be negative effects on your finances and credit score.

Fees & Penalties

First, you will have to pay fees and penalties to settle your existing debt. Paying off a loan early always comes with some degree of fees depending on your original contract. If your loan is straight from the dealer, you will likely face higher fees because these lenders tend to have unfavorable settlement terms. Consider these fees when you are determining if you can save money through consolidation.

Drop in Credit Score

Lenders extend you financing based on the full length of the loan. They determine your interest rate and monthly payments according to this schedule, and they will lose profit if you settle early. As a result, lenders will report this to the credit bureaus. You will face bad credit ramifications for settling a loan early. You should only seek to combine your car loans if the savings you will get on the new interest rate outweigh the negative credit affects and fees. 

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