Advice on Car Purchase with a Home Equity Loan

Although the answer to your question might seem easy (opt for the home equity loan because of tax benefits), it is not always that simple. One should always 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 these low-interest loans may also be a good choice for a major purchase, such as a new vehicle.

Bills.com makes it easy to compare mortgage offers and different loan types. Please visit the loan page and find a loan that meets your needs. For free quotes on HELOCs visit: https://www.bills.com/mortage/refinance/, and for auto loan quotes please visit: https://www.bills.com/autoloan/loan/.

Here are some of the pros and cons going with a home equity loan rather than more conventional auto financing:

Pros:

1. Unlike a car loan, the interest you pay on a home equity loan may be tax-deductible. Let’s say you took out a $20,000 home equity loan at 6 percent and paid it off in four years. Over the course of the loan, you’d pay about $2,500 in interest. If you’re in a 25 percent income tax bracket, deducting this amount would save you more than $600 over the four years. Talk to a tax adviser to make sure 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. In addition, dealers that advertise zero-percent 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. And even getting a rate that’s just 0.5 percent less will save you money.

Cons:

1. You’re putting your home on the line. If you fail to make your car loan payments, the vehicle may get repossessed. However, 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, you must be sure that you can make all the payments and are not stretching yourself thin.

2. A home equity line of credit 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 taking out 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 better interest rate.

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

Best,

Bill

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