How does debt consolidation affect buying a car?
Debt consolidation can positively or negatively affect your ability to buy a car on finance. Keeping up with your consolidated repayments, reducing your monthly repayments, and lowering your credit utilisation could increase your credit score over time and improve your car finance eligibility.
However, a new loan on your credit report may temporarily lower your credit score and make it more difficult to obtain additional finance.
What is debt consolidation?
Debt consolidation is the process of merging multiple debts into a new loan with one manageable monthly repayment. Depending on your eligibility, you may be approved for a debt consolidation loan with a lower interest rate or longer term (with lower repayments) than your existing debts.
Debt consolidation could reduce the stress of having to deal with several different lenders, payment amounts, interest rates, and due dates. It could even reduce how much you pay each month. But extending the term may increase how much you pay overall.
How do debt consolidation loans work?
There are three main ways that you can consolidate your debt:
Unsecured or secured debt consolidation loan – take out a new loan to pay off your existing debts. This may be unsecured, or it may be secured against an asset like your home.
Balance transfer credit card – move your outstanding credit card debts onto a new card with a low or 0% interest rate. A good credit score may be required.
Remortgage your home – switch your current mortgage deal for a new one with additional borrowing and use these funds to repay your loans.
Can debt consolidation help with car loans?
If you successfully manage your debt consolidation loan, it could help you get a car loan in the future. While it may take several months or even years to improve your credit score, paying off your debts (without closing accounts) could reduce your credit utilisation and potentially speed up this process.
On the other side, it’s important to know that getting a debt consolidation loan before buying a car can also:
- Temporarily affect your credit score
- Increase your debt-to-income ratio
- Add a new hard search to your credit report
However, if you can make your loan repayments on time, your credit score should recover and may even improve.
How does debt consolidation affect my credit score?
There’s no one-size-fits-all when it comes to credit; your individual actions will directly impact whether debt consolidation has a positive or negative effect on your credit score and your overall financial health.
Borrowers who take out a debt consolidation loan and keep up with their repayments may see their credit score improve, while those who miss payments could harm their score.
Pros and cons of debt consolidation
| Pros | Cons |
| All or some of your debts will be in one place. | May not be worthwhile if you have a smaller amount of outstanding debt or terms that are due to end soon. |
| It could make your debt more manageable and help you stick to a budget. | If your debt consolidation loan is secured, you would temporarily lose equity in your home, which would also be at risk of repossession if you fail to keep up with repayments. |
| You may have a lower monthly repayment (but may pay more in interest over the full term). | Your interest rate may be higher if you don’t have a strong credit score. |
| Your credit score may improve if you keep up with your repayments. | Your debt might increase if you continue to spend after consolidating. |
| Your assets will not be at risk unless you choose to take out equity from your home. | Your financial situation could be harmed if you fail to keep up with your repayments. |
Can I consolidate my car loan debt?
Car loans can be consolidated alongside your other debts if you’re taking out a debt consolidation loan.
If you’re struggling to pay your car loan, but can afford your other debt repayments, you could consider refinancing. This is the process of taking out a new loan (often with a new lender) to pay off your existing car finance.
You might be able to secure a refinance loan with a longer loan term and lower monthly repayments or get a better APR if your credit score has improved.
There’s no need to wait until you reach the end of your car finance agreement, as you should be able to refinance a car loan at any time during your loan term.
NEED TO KNOW: You could end up paying more for your car loan over time if you choose to refinance or consolidate with a loan that has a longer loan term.
Should I refinance a car loan?
There are several potential benefits to refinancing a car loan:
- You could find a deal with lower monthly repayments and a longer loan term (but added interest means you may pay more overall).
- You could qualify for a loan with a lower APR.
- You could refinance the balloon payment in a personal contract purchase (PCP) car finance deal.
How does a balance transfer credit card affect buying a car?
A balance transfer credit card is an alternative option to a debt consolidation loan. If you have several credit card debts, you might be able transfer the balances onto a new card with a low or 0% APR. This rate is often offered for a limited period and a balance transfer fee may also apply (typically around 2-3% of your debt balance).
Transferring your debts to a balance transfer credit card could help you obtain a car loan in the future if you use it to save money or pay off your debts faster. However, like a personal loan, it will leave a hard search on your credit report that may temporarily decrease your credit score.
If you’re struggling with debt, you can access free financial advice and support from a professional debt specialist. Visit Money Wellness, StepChange, Citizens Advice, National Debtline, or Money Helper to find out more.
Check your eligibility for a debt consolidation loan
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- Personal and homeowner loans available
- Getting a quote is FREE and won't affect your credit score
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Intelligent Lending Ltd is a credit broker, working with a panel of lenders. Homeowner loans are secured against your home.
Disclaimer: All information and links are correct at the time of publishing.
Personal Finance Writer
Verity is a personal finance writer and journalist with over 13 years of experience working in a variety of industries, including 3 years specialising in motoring and debt. She contributes engaging, informative guides on everything you need to know on debt consolidation and car finance for Ocean.
