This calculator will help you to decide whether you should finance your car using an auto loan or using a home equity loan.
Smart Borrowing Saves You Money
For most people, buying a new car will require some form of financing. Typically, that financing takes the form of a standard auto loan, underwritten by either a bank, credit union, or the auto dealer themselves. But there are other ways to finance the purchase of a new vehicle. Today, more and more people are considering home equity loans as an option when financing a new car, truck or SUV. But how can you be sure which option is right for you? The comparative Home Equity vs Car Loan Calculator can help you find the answers.
Home Equity Loans
A home equity loan is a type of loan in which the borrower uses the value of their home as collateral. There are two basic types of home equity loans, the closed end loan and the open end loan. With a closed end home equity loan an individual can borrow against the value of their home, receiving a one time payout with a fixed interest rate. An open end home equity loan, commonly called a home equity line of credit (HELOC) provides the borrower with a revolving line of credit based on the value of their home minus any liens. Typically, interest on either type of home equity line is based on the prime rate plus a margin that will be determined by the lender.
The Advantages of a Home Equity Loan
One of the major advantages of a home equity loan is the opportunity to receive a large sum of money in a relatively short amount of time. This allows borrowers to afford major home repairs, pay off medical bills, eliminate outstanding college debt, or make a major purchase like buying a new car. Moreover, because the loan is tied to the value of the borrowers home, there is less of a chance of the loan being denied.
The Disadvantages of a Home Equity Loan
Taking out a home equity loan, or HELOC, to finance a new car does have certain disadvantages. First and foremost, borrowers must be certain they can maintain the regular monthly payment on their loan. This can sometimes be difficult, especially if the borrower is still paying off their first mortgage. Unlike a standard auto loan, where default means repossession, failure to pay off a home equity loan can put the borrower's home at risk for foreclosure.
Saving Money with a Home Equity Line of Credit
One of the chief reasons people choose home equity loans over standard auto loans is the opportunity to save money. While loan rates vary from state to state, and market rates are always in flux, experts estimate that it is possible to save between 7% and 15% on an automobile purchase by choosing a home equity loan as opposed to a standard auto loan. This is because home equity loans typically have lower interest rates than auto loans, and quite often the interest on a home equity loan is tax deductible.
If you're in the market for a new car, the Home Equity vs Car Loan Calculator can help you determine which financing option is most suitable for your needs. However, remember that all loans carry some risk and it is important to consider all of the variables before signing any contract.