Advice on Car Purchase with a Home Equity Loan

The answer to your question might seem easy — choose the home equity loan for the tax benefits — it is not always that simple. Consider the benefits and risks before choosing a home equity loan to finance your new car. A home equity loan or home equity line of credit (HELOC) is a popular way to pay for a home renovation, but low-interest loans may also be an enticing choice for a major purchase, such as a new vehicle.

Here are some pros and cons of a home equity loan in comparison to a conventional auto loan:

Pros

1. Unlike a car loan, the interest you pay on a home equity loan may be tax-deductible. Say you took out a $20,000 home equity loan at 6% and paid it off in 4 years. Over the course of the loan, you would pay about $2,500 in interest. If you are in a 25% income tax bracket, deducting this amount would save more than $600 in 4 years. Talk to a tax adviser to learn if you qualify.
2. By getting approved for a home equity loan before you visit the dealership, you may be able to negotiate a better price. Some dealers that advertise 0% financing often offer a rebate to buyers who pay the full price up front. Your home equity loan will allow you to take advantage of this rebate.
3. Auto dealers almost always mark up the rate. A home equity loan will usually carry more favorable terms than what you would get at the car lot. Even a rate 0.5% less will save money over 4 years.

Cons

1. You put your home on the line if you fail to make your home equity loan payments. You put only your car on the line if you fail to make your car payments. The consequences of defaulting on a home equity loan are much more serious — you may be forced to sell your house. If you decide to secure your vehicle loan with your home, be sure that you can afford the payments and are not stretching yourself too thin.
2. A HELOC is often a good option to finance a car because it usually carries lower closing costs than a home equity loan. However, a HELOC, unlike a car loan, usually has a variable rate and over several years the rate could rise significantly, making it more difficult for you to meet your payments.
3. Processing a home equity loan may involve higher upfront fees than a car loan. In addition, adding a second mortgage may require you to purchase private mortgage insurance (PMI). This additional cost could eat up any savings you would get from the lower interest rate.

Whether you opt for a HELOC or an auto loan, be sure to shop to find the best deal. I hope the information provided helps you Find. Learn. Save.

Best,

Bill

Bills.com