Should You Consolidate Your Home and Car Loans?
Debt consolidation is a popular topic these days, but many people think it is only for those who have credit card debt that they cannot manage. This is not true, as you don’t need to be in financial peril in order to consolidate your loans.
What is Debt Consolidation?
Debt consolidation refers to the practice of getting a single loan and using the proceeds to pay off several smaller loans that have higher interest rates. The advantages are that your interest rate on the consolidation loan is lower, so you are paying less per month to service the same amount of debt. You also have only one payment per month, which is often easier for people to handle.
How Can Debt Be Consolidated?
One of the most common ways to consolidate debt is to take out a single, unsecured loan and pay off multiple credit card and other loans with the funds from the consolidated loan. But you can also consolidate larger, secured debt such as car loans and mortgages. Given the current low interest rate environment, taking out a larger mortgage and using some of the proceeds to pay off high-interest rate debt can be a very smart move.
Consolidating Car Loans
If you have more than one car loan, you may be able to consolidate them at a lower interest rate than what you are paying now. Or, you may be able to consolidate your car loan or loans with your mortgage. Mortgages and car loans are secured debt, meaning that the lender can take the property (your home or car) if you default on the loan. This allows the lender to offer a lower interest rate.
How Much Will You Save?
Let’s look at an example. Suppose you have two auto loans. One is for $25,000 for 60 months at 6%. Your monthly payment is $483. The other loan is for $15,000 for 48 months at 7%. Your payment on that loan is $359, so you’re paying a total of $842 a month for two cars.
Your current mortgage is for $200,000. You take out a new mortgage for $240,000 at a 3.5% interest rate. You use the extra $40,000 to pay off the two car loans. You have now consolidated your home loan and your auto loans into one loan – the new mortgage. The $40,000 that was costing you $842 a month in car loans is now costing just $179.62 per month. (Note that this amount represents the part of your mortgage payment that is covering the car loans. Your monthly mortgage payment will be higher.)
Whether it makes economic sense to consolidate your car and home loans will depend on your specific circumstances. Clearly, it is an option worth exploring.