What Is The Danger Of Combining Car Loans?

Combining car loans is possible through a debt consolidation loan. Many people think a dealership will be able to offer debt consolidation if they have two loans through one source, but this is not possible. You must seek a third loan, usually through a bank or dedicated consolidation lender, to pay off the initial loans. Then, you can start paying just one monthly payment. 

Early Pay-Off Penalties

Paying off a loan early will always come with some type of penalty. Lenders agreed to certain terms with you when you signed your loan contract. By paying off early, you are violating those terms. Car dealerships and auto lenders are notorious for having large pay-off penalties. They may not be up-front with you about those penalties either. When they present you with a "pay-off" quote, it may be significantly higher than if you allowed the loan to mature and continued to pay monthly. Do the math to figure out exactly what you are being charged and what you stand to save.

Securing Best Interest Rates

Your two or more car loans do not likely have the same interest rate. You want to make sure the interest rate you are getting on your consolidation loan will truly save you money. This means you cannot accept a loan that is a higher interest rate than either of the loans you already have. Again, you have to do the math to figure out the total cost of the change over time. If you can consolidate to significantly reduce one interest rate and raise the other slightly, it may be worth the change. In this case, also consider refinancing just one of the car loans. 

Affects on Your Credit

Any time you modify a loan, whether you pay it off early, refinance or consolidate, there will be a negative mark on your credit history. Lenders like to see you pay off a loan according to the initial agreement. Allowing a loan to mature fully and making regular payments will raise your credit tremendously. Breaking a contract and paying off early will appear as a warning flag to future lenders. They will fear you will break your contract with them in the future. Credit health is an intangible benefit and is much harder to measure than the financial implications. Only you can decide how important a negative mark on your credit is.

Risk of Default

Any time you consolidate your loans you assume a higher risk in the case of default. In this instance, you will be transferring your car titles, two or more, to one new lender. If you default on the loan, the lender has the right to seize one or all of the vehicles depending on the amount you have defaulted on. You will only lose one car on a default as long as each of your titles is held separately. Only consolidate if you know you have the discipline and financial ability to meet the terms of the new loan. 

 


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