Should You Buy a Car with Home Equity?

If you are looking for low interest auto loan rates, you may have considered using your home equity to finance your new vehicle. Before you choose this type of loan, consider the pros and cons.

Advantages of Home Equity Auto Loans

Home equity auto loans consistently offer low interest auto loan rates. If you own a home, they can be an affordable and practical way to finance your new car. Here a few of the advantages to home equity car loans:

• Very low interest auto loan rates. Home equity loans almost always have better terms and rates than what you would get from a dealership or even some independent lenders. Even if your interest rate is just 0.5% lower with a home equity loan, this can add up to real savings over the course of the loan.
• The upper hand. If you walk onto a car lot having already obtained a loan with low interest auto loan rates, you will have taken a very important bargaining chip out of the dealer’s hand. You are now free to bargain with the dealer solely on the basis of the vehicles price instead of monthly payments, and you may get a better deal as a result.
• Tax-deductible interest. Most home equity auto loans allow you to deduct the interest expense from your income taxes. Don’t count on these savings, though, until you’ve confirmed them with an accountant or other tax advisor.

Risks of Home Equity Car Loans

Though you may find very low interest auto loan rates by accessing your home equity, these loans are not without their risks. Here are some of the drawbacks you should bear in mind:

• Losing your home. If you hit a financial rough patch and are unable to make the payments on a home equity loan, you could lose your home. To some, a new car may not be worth this risk.
• Charges and fees. Sometimes the low interest auto loan rates of home equity car loans are not worth the higher closing costs that accompany these loans. You may also have to purchase PMI (private mortgage insurance) if you take on a home equity loan.
• Rising interest rates. If you decide on a HELOC (home equity line of credit) instead of a home equity loan, interest rates will be variable and could rise over time. See how low interest auto loan works on the next page.