Does debt consolidation affect buying a car?

Can debt consolidation help me get a car loan?

Consolidating your debts means that managing your finances should be easier, which could improve your chances of getting a car loan in the future. Building up a strong payment history should boost your credit score and show lenders that you are a responsible borrower.

Consolidating your debts may also mean lower monthly payments, which could free up some cash to use towards a car loan. But remember that spreading repayments over a longer period can lead to you paying more in total.

On the other hand, if you miss payments, this could reduce your credit score and eligibility for car finance. This is because lenders may see you as more of a risk.

What is debt consolidation and how does it work? 

Debt consolidation involves moving some or all your debt into one place. That may mean one monthly repayment, and one lender, which could make it easier to get on top of outstanding credit.

There are three main ways of consolidating debt:  

• Unsecured or secured debt consolidation loan – you could take out a new loan to pay off your existing debts. Secured loans are tied to an asset like your home (if you’re a homeowner), which may make it easier to get approved. However, your home may be at risk if you fall behind with repayments (in the worst case). You don’t need any collateral to get an unsecured loan (or personal loan), but you may need a higher credit score.   
• Balance transfer credit card – you could move multiple credit card debts onto a new card with a low or 0% interest rate. You may need a good credit score to get approved, and the interest usually goes up after an initial promotional period. A balance transfer fee may apply (around 2-3% of your balance).
• Remortgage your home – involves switching your current mortgage deal for a new one with additional borrowing, then using these funds to repay your debts. It’s best to speak with a mortgage adviser about this option.

You may be able to get a lower interest rate than you’re currently paying. Spreading repayments can mean lower monthly repayments, but more interest payable overall.

Pros and cons of debt consolidation

Pros	Cons
All or some of your debts will be in one place, which could make it easier to manage.	It may not be worthwhile if you have a smaller amount of outstanding debt or terms that are due to end soon.
You could reduce your monthly repayments.	Spreading your repayments over a longer term may mean you pay more in total.
Your credit score may improve if you keep up with your repayments.	Your credit score will decrease if you don’t keep up with your repayments.
You could find a consolidation loan or balance transfer credit card with a lower interest rate.	Your interest rate may be higher if you don’t have a strong credit score.

Does debt consolidation affect my credit score?

Yes, debt consolidation can affect your credit score and ability to get car finance, positively or negatively.

When you apply for credit to consolidate your debt, the lender will carry out a hard search of your credit report to check your creditworthiness. This hard search can cause a temporary drop in your credit score, which may put some lenders off in the short term.

However, if you always pay on time, it should boost your credit score in the long term. In turn, this could improve your eligibility for car finance (or any other type of credit) in the future. Any missed payments will have the opposite effect.

While it may take a while to improve your credit score, consolidating credit cards (without closing them) could reduce your credit utilisation ratio and potentially speed up this process.

Can I consolidate my car loan debt?

Yes, it is possible to consolidate car loans if you meet the lender’s criteria. You could potentially take out a debt consolidation loan to pay off your outstanding car loan, along with any other debts, and roll them into one monthly payment.

You might be eligible for a loan with a lower interest rate if your credit score has improved since taking out the original debt. And you may be able to reduce your monthly payments if you spread the cost over a longer period. However, a longer loan term usually means you pay more interest overall.

Should I refinance a car loan? 

Car refinancing involves taking out a new car finance agreement to pay off the balance on your existing car loan. Debt consolidation, on the other hand, involves taking out a secured or unsecured loan to pay off multiple debts at once.

Advantages to refinancing a car loan

• You could get a shorter loan term to pay it off quicker
• You may be able to reduce your car finance payments
• You could get a lower interest rate if your credit score has improved
• You may be eligible for a car loan to spread the cost of a final lump sum payment on a PCP contract

Disadvantages to car refinancing 

• Car refinancing only relates to your car loan, not any other debts
• You might not be eligible for a better deal than your existing finance
• Spreading the cost over a longer time frame may mean you pay more in total – even if you’re offered a lower interest rate
• Your rights might change when you switch to a new deal

Can I get free debt advice?

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 MoneyHelper to find out more.