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Many individuals who have various types of outstanding loans opt for debt consolidation. This means that they combine different loans under a single debt obligation. Debt consolidation helps borrowers to reduce their interest costs.
Such consolidation is common among personal, home, and student loans. Even though it is not very common with automobile loans, individuals may consider consolidating two vehicle loans under a single facility to pay a single Equated Monthly Installment (EMI).
Here are three common reasons to consolidate used car loans.
1. Effective management
In case an individual has purchased more than one vehicle on a loan, he needs to manage multiple payments. This multiplicity makes it complicated and he may forget to pay the EMI on time, which may incur late penalties. However, this situation is easily avoidable through consolidation of the different car loans. It makes it simpler for borrowers to manage timely payments.
2. Reduction of interest costs
It is possible that borrowers may have availed of the used car loans at different rates of interest. A common reason why borrowers consolidate multiple vehicle loans is to reduce their interest costs. Combining the loans under one credit facility will help reduce the interest rate, which results in savings.
3. Improvement of credit score
Every credit facility (present as well as past) is used by rating agencies to determine an individual’s credit score. When a person has multiple car loans, wherein the EMIs may not be payable in the same month, he may sometimes miss a payment. This may negatively reflect in his credit score. Debt consolidation will eliminate such possibility and ensure EMI payments are not missed. This will thereby help to improve the individual’s credit score.
Although there are several advantages of auto loan consolidation, it also entails some risks. Here are three instances where debt consolidation is not advisable.
1. Unpaid EMIs
If an individual has unpaid EMIs on one or more of his car loans, he may not be able to consolidate the loans. He will need to pay the outstanding EMIs before processing the consolidation.
2. High rate of interest
Lenders take into consideration several factors, such as income, credit score, and age of the borrower while determining loan eligibility and interest rate. It is likely that an individual may not be eligible for a lower rate of interest, which eventually does not result in savings. In such cases, debt consolidation is not advisable.
3. Extended loan tenure
With debt consolidation, the borrowers may prolong their loan tenures. Extending the tenure will result in the individuals paying more than what they would have paid under the original loan.
Not all lenders provide auto loan debt consolidation. Individuals are recommended to clearly understand the entire consolidation procedure and its terms and conditions before making a decision. They may consider other options, such as selling one car or refinancing a high-cost auto loan prior to consolidating their debt.