The Pros and Cons of Buying Car with Home Equity Loan

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When you are planning to buy a car, the first thing you need to prepare is how you can pay for the buying price. Unless you’re really loaded to buy car in cash, you will need to find a loan. Most people would try to find the right auto loan that meets their needs in terms of proper amount of loan, reasonable interest rate, and the amount of monthly payment won’t be too much burdening. Actually, there’re other options and one of them is buying car with home equity loan.

What is Home Equity Loan

Home equity loan, also commonly known as the second mortgage, is a loan with home equity as the collateral. The amount of loan is based on the appraised value of the house. Although home equity loan is usually used to pay the mortgage (or the first mortgage), actually there’s no strict rule how the borrower will use the money from the loan. It can be used for anything including to buy a car. As the value of the house is usually higher that the price of the car, the money from home equity loan allows you buy car from the dealership in cash.

It sounds like interesting but the again, you can’t be too careful about loan. It is important to consider every factor before you make any decision. Don’t forget, wrong decision about loan can bring significant impact to your financial life for years to come. So, here are the pros and cons of buying car with home equity loan.

The Pros

  • Convenience

Using home equity loan to buy a car is more convenience compared to auto loan. You can save time and energy from shop around different auto loan products with different interests and payment terms. Taking home equity loan is much simple as you don’t need to redo the loan application process from scratch. Even the repayment schedule and amount can still be the same.

  • No Down Payment

With auto loan, you need to prepare a significant amount of down payment. As home equity loan uses home equity as collateral, no down payment is needed.

  • More Flexible and Longer Term

Repayment for auto loan is between 36 to 60 months while home equity loan can offer up to ten years repayment terms.

  • Interest is Tax-Deductible

The amount of interest you paid for home equity loan is tax-deductible. It won’t work the same with auto loan.

The Cons

  • Higher Interest Rate

Home equity loan interest rate, even for those with good credit rating, is around 5 to 6%. Auto loan only charges 2-3% of interest rate. Even for someone with excellent credit rating, the lender may give an option of 0% interest for 60 months.

  • Gambling with Your Home

As the loan uses home equity as collateral, you can risk losing your home when you failed to pay the loan. Don’t forget that this loan covers buying of a vehicle, an asset that with depreciating. Separating mortgage with auto loan is also much better for your overall finances.

Consider the pros and cons and you will be able to make a decision whether buying car with home equity loan is good option for you or not.

Read also, How to deal with the Student Loan Grace Period when it is almost over .

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