financial question for those good with numbers (loans & such)...

[BWVDenise]

What would be better: Paying a home equity line of credit at 4.5%, or a car loan at 4%? I'm wondering because the interest on a home equity should be a tax deduction, but would it be enough of a deduction to offset the 1/2 % higher interest?

 

[bsnyder]

That's going to depend on more than just the 1/2 point interest rate difference.

Your income, your tax bracket and the total amount of your deductions are all part of the equation.

And if you're going to use a HELOC to finance a car, you really should amortize and pay down the principal portion in a reasonable amount of time, probably no longer than 5 years.

 

[mudnuri]

I agree!

A car loan- the interest rate depends on the length of the loan. A home equity loan- is a lot longer than a 5 year loan!

The one thing I was always told. "dont use your home, for anything other than your home"...meaning. if DH and i were to take out a home equity loan, we'd put the money back into the house, with renovations, updates etc.

We did get a personal loan, for a motorcycle. The interest rate was a lot lower than any bike loan we could find...and the term was shorter

Brandy

 

[bsnyder]

There's nothing wrong with using a home equity line of credit to purchase a car, and there can be a number of good reasons for doing so, not just the lower interest rate or the tax deduction.

Some people have large fluctuations in their cash flow (they may get paid on commissions or bonuses that are fairly substantial) and using a home equity line can help if you have a large purchase you have to make before you have the anticipated income.

But just make sure that you make monthly, quarterly or even yearly payments that are large enough to reduce the principal balance of the line on the portion that represents the car purchase. Many home equity lines have interest only minimum payments. If you never pay any of the principal down on the portion of the balance that represents the car purchase, you'll have an asset (the car) that's greatly depreciated in value, that you haven't paid for.