Consolidating a car loan into your mortgage: does it make sense?

Interest cost is rate multiplied by balance multiplied by time. Moving a debt from 9 per cent to 6 per cent cuts the rate by a third, but moving it from five years to thirty multiplies the time by six. The time effect wins. The only way to capture the rate benefit without the time penalty is to keep making the car loan sized repayment into the mortgage, either as extra repayments or by setting the consolidated portion up as a separate split with a short term.

When cash flow is the problem and the alternative is missing repayments. When the car loan has a high rate, fees or a balloon that is about to fall due. When you are refinancing anyway and can set the car amount up as a short split. When the car loan is secured on a vehicle that has depreciated below the loan balance and you want to sell it. In each case the plan is to pay the consolidated amount off fast, not to enjoy the lower minimum.

A car loan is a standard consolidation item. The lender needs the payout figure, pays the financier at settlement and obtains a release of the security over the car. Serviceability improves because the car repayment disappears and is replaced by a smaller mortgage increase, which is often the reason a borrower can qualify for the refinance at all.

Ask the lender for a separate split for the consolidated amount, on a five to seven year term or with the extra repayments directed to it. Set up an automatic extra repayment equal to the old car repayment. Treat the car portion as cleared when it is cleared, not when it is absorbed. Specialists set this up at settlement so it does not rely on willpower.