Consolidating Your Auto Debt
Like most consumers, you're probably paying off a few other debts in addition to your car loan. Mortgage payments, credit card bills, boat payments -- if only there was a way to tie all these debts together into one, easy, monthly payment.
Welcome to the world of debt consolidation where you take out one big loan, and use it to pay off all your smaller debts at once. Do it right, and you can end up saving a good chunk of money per month. Do it wrong, and you could find yourself paying out much more than before.
The first benefit of a loan consolidation is convenience. By streamlining your debt, you lower the amount of bills in your mailbox and simplify your monthly budget. Secondly, just as with refinancing, a consolidation may allow you to pay a lower, overall rate of interest. People with high-interest credit card debt are particularly drawn to loan consolidation, but consolidation may also make sense for your car loan if you walked out of the bank/dealership with a particularly costly financing scheme.
Overall, you should only consider debt consolidation if your credit rating is in relatively good shape and you have no trouble paying off your existing loans. A consolidation loan is a big commitment, and a financial institution is unlikely to grant it unless you can prove that you're good for the monthly consolidation payments.
Before you consolidate, remember that your debt consolidator may also be less understanding than your individual creditors. Your auto loan lenders may be more than willing to ignore the occasional late payment or negotiate an alternative payment schedule if you hit hard times. A bank, on the other hand, might be more prone to send in the debt collectors.
And, by mixing together all your debts, all your assets are now equally at risk. With a simple car loan, if you default on your car payment, a lender could repossess your car - but wouldn't have any title to your house. A consolidator, however, can go after your car, your house, your boat -- anything you've included in the consolidation scheme.
If your finances are a little shaky, be extremely wary of any institution that offers you debt consolidation. Stressed, debt-ridden consumers are easy prey for shady debt consolidators. One trick is for consolidators to lower your monthly payment, but dramatically increase the interest rate and the terms of payment. You'll be paying less per month, but you'll be paying for much longer, and with interest rates as high as 20 percent [source: Dunleavy] Be wary of any debt consolidators that charge high, up-front fees, or promise outlandish offers like 0 percent interest or "instant" debt relief.
If you're unsure about whether to consolidate, consider calling up a non-profit credit-counseling agency.
Should you get struck by lightning or lose all your money at the racetrack, keep reading to find out how to work around a payment default.