For people who have equity in their homes, it can be tempting to use that money to make large purchases like a car.
When you do this, you use your home as collateral – meaning you are borrowing money against your home in order to buy a car. In simple terms, you are letting the bank use your home as a guarantee that you’ll repay the money.
This can be risky, but some people do it. Here are some pros and cons against using your home equity to purchase a vehicle so you can make a well-informed and financially wise decision.
It Allows You the Flexibility to Pay Off Your Car’s Debt Over a Longer Period of Time
When you get a car loan through a bank, most lenders allow you to pay the debt over a period of 36 to 60 months. Sometimes, the loan terms can extend as far as 72 to 84 months.
However, when using a home equity loan, you can usually pay that back over a 10 or 20 year period. Although you likely wouldn’t want to take 10 years to pay off your car’s debt, it is good to know that you will have that option should financial hardship arise.
The Interest on Your Home Equity Loan Can Be Deducted from Your Taxable Income
Unlike car loans, interest paid each year on a home equity loan is tax deductible. This means that you can write off the interest payments and save some money on your annual income taxes.
The Interest Rates Are Higher Compared to Auto Loans
With a home equity loan, you’ll likely be charged a higher interest rate compared to an auto loan, especially if your credit score is good.
If you are an eligible borrower, you might get interest rates as low as 2 to 3 percent (some even have no-interest promotional offers) from auto lenders. Interest on a home equity loan would run higher.
You Have Closing Costs
Just like any mortgage, a home equity loan will have associated closing costs. On the other hand, it’s become quite common to be able to take out a car loan without having a down payment or paying any out-of-pocket expenses.
You are Having Your Home Held as Collateral
Though you may feel you’re able to make the payments, the truth is that you never know what could happen. In a worst-case scenario, if you default, you have guaranteed your home to purchase your car. Simply put, your home could get repossessed.
If you have a traditional car loan and are unable to make the payments, the collateral is your car – meaning that’s what they’d repossess, not your home.
We at TILA Mortgage are a trustworthy and reliable mortgage company in Tacoma. We have your interests in mind, and from helping you choose a competitive loan program to refinance home loans, we’ve got lots of loan solutions for you. Get a free consultation and talk with an expert – we’re ready to help with all your home loan needs.