Auto Loan or Home Equity Loan — Learn About The Best Car Financing Options

Buying a Car: Home Equity vs. Auto Loan

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Potential car buyers usually opt for auto financing when the time comes to get a car loan. But the fact is that more and more people are turning to alternative loan methods these days when buying both new and used cars.

Home equity loans, for example, are no longer meant solely for home renovation — nor are they used only as a way of getting fast cash to pay off other debts. While home equity loans certainly remain popular for home improvement and as collateral to help finance other expenditures, people just like you have begun to realize that home equity loans are another viable way to get a car.

Should I choose a home equity loans over a standard auto loan?

As always, loan rates will vary by state and are subject to the then-current market rates, but some experts say that a home equity loan can save you as much as 15% on a $20,000 car purchase — with actual savings based on the life of the loan: savings equal to nearly $1,400, or 6.9% savings, on a three-year, $20,000 loan; and nearly $2,900, or 14.2% savings, on the same $20,000 purchase, as compared to a standard auto loan for the same duration.1

Home equity loans often have lower interest rates as compared to auto loans, and the interest rates on home equity loans are often tax-deductible.

To look at a brief example, plug in the expected overall purchase price of your new or used car into the online calculator above. Make certain that you know the precise interest rate of the loan, any additional fees associated with the loan (such fees often vary by state), how much money you plan to put down for the car, and the overall duration of the loan. Use, for example, a standard three-year auto loan (auto loans are most often measured in months, so a three-year loan lasts a total of 36 months), and compare payments you would be making using a home equity loan.

Again, interest rates on conventional auto loans are not tax-deductible, but many home equity loan rates are. According to recent statistics2 (as of 12/2007), the national average for a three-year auto loan on a used car is 7.29%, while the average interest rate is 6.58% for a new car. Average home equity loan rates during the same time period are 6.83%.

Depending on your individual credit needs and credit rating, you may also be eligible for a lower-cost home equity line of credit (HELOC). By definition, a HELOC differs from a conventional home equity loan in that you're not advanced the entire sum upfront. Instead, you can use this line of credit to borrow sums that total no more than the overall amount needed.3 In that way, for purposes of getting a car loan, a HELOC is a lot like a credit card.

How do overall car financing and car loan rates differ from loans for other major purchases?

One important thing to remember is that, unlike a home, a car is a depreciating asset. The moment you drive a new or used car off the lot, it automatically starts to decrease in overall value. And you don't want to take 10 years to pay off a car that you may only end up driving for five years or less. So whether you buy a new or used car, and regardless of how you finance it — either through standard auto financing or through a home equity loan — plan to pay off the loan in accordance with how long you expect to own it. That way, you can build up some equity in the car before you arrange to buy or lease your next one.

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