Buying a car with a home loan

Buying a car is expensive, so any way you can save is big help. One way that might make sense for some buyers is to take out a home equity loan. There are advantages and disadvantages, so you should read on to see if this option is right for you.

More below.

Home equity loan might make sense for car purchase

It’s amazing how much it costs to buy a car these days. The price of cars can easily exceed what our parents paid for their homes just a few decades ago. And the sticker price doesn’t even take into consideration the high costs of gasoline or car insurance. It can cost a fortune to buy a new car or truck and paying off the loan can take years. In fact, the most popular car loans offered today are six years in length.

Most people who buy cars, trucks or vans take out an auto loan to make the purchase. Few people have available cash, so a loan lets you drive now and pay later. Such loans can be arranged either through the dealer or through your bank or credit union. The interest rates aren’t all that good, though. They’re better than for credit card loans, but the rates still tend to be higher than for other types of lending. Is there a better option for buying a car? 

One possible solution that may work for homeowners is to take out a home equity loan. Equity is the difference between the market value of your home and the amount you owe upon it. As that portion of your house has value, lenders are willing to lend you money with that equity as collateral for the loan. It’s also known as taking out a second mortgage. There are some advantages to home equity loans that you won’t find with a car loan, too.

The first of those advantages is that the interest that you pay on a home equity loan is deductible from your Federal income tax. Not all consumers are able to itemize deductions, but for those who can, deducting the interest on your home equity loan is like getting a discount on the interest rate. If you pay taxes at a rate of 25% or so, your deduction will amount to a 25% rebate on the interest rate. That’s a pretty good deal that you won’t get with a car loan.

Another bonus is that the interest rates are lower than they are for car loans. Unless you have poor credit, you should qualify for a rate that is far better than those you can get for a car loan. Lower rates are always a bonus for the price-conscious consumer.

There are some things to consider before running down to a mortgage company. One of them is that you should make sure that the amount of time you take to repay the loan is in agreement with the length of time that you plan to own the vehicle. You don’t want to take out a ten year loan if you regularly trade your cars in every two years. The other thing to consider is that a car loan uses the car as collateral; if you don’t pay, they repossess the vehicle. With a home equity loan, if you don’t pay, they will foreclose on your house!

But if you are financially diligent and can itemize tax deductions, using a home equity loan to buy a car can make a lot of financial sense.