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Should You or Shouldn’t You Use Home Equity Loan for Auto Financing?

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Here in Colorado Springs, there are many lenders that offer auto financing to car buyers (one such lender is Colorado Springs Auto Approval Center). While there is no shortage in auto lending options in the city, many residents find themselves seeking for alternative loans with which to pay their auto purchase. One such alternative loan is the home equity loan. A home equity loan is borrowed against the current market value of the house minus the remaining mortgage balance.

If you are in the market for a new car and is considering financing it, should you or shouldn’t you take out a home equity loan? Read on to find out.

 

When and Why Home Equity Loans are Ideal for Auto Purchases

If you are able to properly manage your finances, using home equity for an auto purchase may be a good idea. A home equity loan may be able to save you more money overall. As long as you make the payments on time, you wouldn’t be burdened with debt.

According to some experts, there are more savings to be had with a car purchase funded by a home equity loan. This is because such loan comes with less interest than a standard auto loan, making it less expensive. Not only are the interest rates of home equity loans lower, most of the time these are also tax-deductible. This cannot be said for interest rates of conventional auto loans.

Be reminded that loan rates differ from one state to the next and are subjected to the then-current market rates. The rate you will get for a home equity loan, should you apply for one, will depend on your credit rating and other credit needs.

 

When and Why Home Equity Loans are Not Ideal for Auto Purchases

On the contrary, if you find it difficult to keep your finances in order, it would be better for you to apply for a conventional auto loan.

A home equity loan is also known as ‘second mortgage’ for a reason. When you use such loan to pay for an auto purchase, you borrow against your house. You will end up paying both your mortgage and your home equity loan. In the event you are unable to make payments for the loan, you can lose your home. Your house is not worth losing over an unpaid loan taken out to pay for a depreciating asset. A car depreciates quickly over time, losing about 9 percent of its value after it is driven off the dealer’s lot. It is unlike a house, whose value can increase over time. If you think you may have a hard time making the payments, don’t apply for the home equity loan.

Another reason not to use a home equity loan to fund a car purchase? You are required to borrow the entire amount and owe interest for it too. If your home’s equity is $40,000, you must borrow $40,000 even if the car you will be buying is only worth $20,000. You cannot borrow just what you need.

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