Home Equity Loan for Used Car?

[dizcrazy]

Okay, my budget friends!
DH & I are looking to buy a used SUV within the next month.

We are reseaching rates right now for used car loans and also for hoime equity loans.

I know that with the home equity loan, you can write off the interest on your taxes. So . . . is this the better way to go? any thoughts?

 

[Cindy B]

I personally wouldn't do that. That is just my opinion of course. Think of how much the car depreciates.. the moment they get off the lot!

I saved cash, and bought, not one but two SUV's this year. It was all from ING referral money, Ebay Sales, and some but not a lot of payroll deduction from savings.

 

[elgerber]

If you are going to take out a loan for a car no matter which way you go, and you have the equity, I would do it. I have all 3 of my cars on a home equity loan. I make the same payments I would make if it were a fixed period car loan, instead of the minimum monthly equity line payments (which are usually interest only), so they will not take 15 years to pay off, and I get to deduct the interest.

 

[HM]

We bought our last two new cars that way. We find we pay off an equity account faster than we would a traditional loan,as well as the enjoying the savings the low interest rate gives us. Plus, as you say, you can use the interest as a deduction on your taxes. -HM

 

[strasfamily]

I asked my husband if we should do that, and he reminded me that if something drastic were to happen, we could lose our house if you couldn't make the payment on the equity loan. Better to take the hit on your credit and have the car repossessed than losing your house.

 

[Miss Jasmine]

I go absolutely nuts whenever anyone talks about taking equity out of their home (an appreciating asset) to buy a car (a depreciating asset), if it's a case of not managing your money wisely. However, it sounds like you are making a sound decision. But like another poster said, if you can't make that payment, your house can be foreclosed on.

 

[crisi]

I'd rather pay cash for a car, but if the interest rate is low, you get the tax deduction, and you have a manageable risk level about "losing the house" - go for it.

Most of us have mortgages, so if something happens, we are at risk for losing the house. Its a risk you live with each day and it probably isn't keeping you up nights now.

I wouldn't exceed the equity by 80% - in other words, if you have a house worth $100,000, I wouldn't have mortgage plus home equity loans in excess of $80,000. And, if you are nearing retirement or a reduction in income (stay at home mom-hood, for instance) you want even more equity than that.

 

[dizcrazy]

Still not sure what do . .

I guess I'll run the figures again - last time I checked, we would be paying 2.5% LESS with a home equity loan. (that would include the tax savings)

We are going to get used and have saved up about 1/3 for a down payment. So we are trying to be frugal. (It just gets tough for us when we are on those car lots. Ahhhh, the smell of a new car!)

I think I'll do some more reading and go over our budget again.

 

[Dopey Sharon]

We took out a home equite loan to buy a used car. The interest rates were a lot lower. We've since paid it off, early.

Unless you're the type to not pay your bills, why wouldn't you take a home equite loan instead of a car loan, to save money?

 

[Lisa loves Pooh]

Originally posted by Dopey Sharon
We took out a home equite loan to buy a used car. The interest rates were a lot lower. We've since paid it off, early.

Unless you're the type to not pay your bills, why wouldn't you take a home equite loan instead of a car loan, to save money?

I agree--if you can discipline yourself to model your payments on your HE Loan as if it were a vehicle loan--then it is a wonderful idea.

But--if you have so little equity in your home that a used car loan of which you paid 33% down in cash would make your home that at risk of foreclosure (i.e.--not enough pad that you could sell it even for less than what it is worth but for more than what you owe on it)--then it wouldn't be a good idea.

Everyone's view of debt is different, so the answers here will cover those opinions. It is up to the OP to decide if it is worth the risk. In our area--homes are appreciating so much (even after 3 hurricanes) that a used car loan via home equity won't make or break you. If you plan on the purchase anyway, are able to afford the purchase, then taking the lowest interest route is a wise choice.

If everyone went on "what ifs", then noone would buy or do anything b/c there is always a risk of a car accident, illness, death or job loss everyday. Noone would acquire debt and everyone would be hoarding cash in the off chance that something happens. Using that same logic to justify not utilizing home equity for responsible purchases that will save you money just doesn't make sense if all the arithmetic works in your favor.***

***This is so long as you don't turn your could have been 3-5 year loan purchase into a 15-20 year purchase. Otherwise you will be paying about triple the purchase price and in the end save no money at all.

 

[disneysteve]

I agree with Lisa loves Pooh, elgerber and the others who said the same thing.

It makes no sense to pay 2.5% HIGHER interest if you can avoid it with a HEL. As long as you have the discipline to pay off the HEL in the same amount of time as you would pay off an auto loan. Your bank can probably arrange automatic withdrawals to do just that so you can automate the process.

Don't do this if you will take 10-15 years to repay the HEL because then even with the lower interest rate, you will pay back a higher total due to the longer loan term.

Cindy B - I'm wondering why you think it is a bad idea. What does depreciation have to do with the fact that you'll end up paying less for the car due to the lower interest rate? Also, keep in mind that OP is buying a USED car which will depreciate much slower than a car purchased new.

FYI - Did you know that the average new car loses 38% of its value after 1 year?

 

[JayCT]

There was a similar question asked recently about using a Home Equity Loan to pay off credit card debt. I was amazed at how many people said not to it. I agree that you must be disciplined and not use to buy something you really do not need, but debt is debt and you should try to pay out the least amount of interest possible. Just try to be disciplined enough to make more than the minimum payments and pay it off in a couple of years.

 

[disneysteve]

Originally posted by JayCT
There was a similar question asked recently about using a Home Equity Loan to pay off credit card debt. I was amazed at how many people said not to it. I agree that you must be disciplined and not use to buy something you really do not need, but debt is debt and you should try to pay out the least amount of interest possible. Just try to be disciplined enough to make more than the minimum payments and pay it off in a couple of years.

Using HEL to pay off CC debt is slightly different, though not fundamentally. The problem here is some people who charge irresponsibly take out a HEL, pay off the CC, then proceed to keep charging new purchases to the CC and end up much deeper in debt. For those people, going the HEL route is an invitation to disaster. If you didn't have the financial discipline to avoid accumulating CC debt in the first place, you won't likely have the discipline needed to pay it off this way.

 

[SWVA BGSU Fan]

I would like to clarify something regarding using an equity loan or HELOC for whatever purpose. There a a couple of posts that make reference to the dire consequences of taking an equity loan and having a tragic situation such as a job loss or illness. In many states (I think Texas and Florida are exceptions... there may be a few more), equity in your home can be be used to satisfy creditors in the unfortunate situation of bankruptcy. It doesn't matter if the real estate is pleged or not. Granted that there may be a certain amount that can be exempted, excess equity in your home can often be used as a conditon to pay back part of the debt or it can be liquidated by a bankruptcy trustee. I know this isn't the main idea of the thread but it was discussed.

From a personal standpoint, I don't like the idea of using a HELOC to finance a vehicle. The temptation to not retire the debt in 3-5 years is too great. I think a better idea is to find a very low closing cost (closed end) equity loan and run the term no longer than 60 months.

 

[MrsPete]

NO WAY! When we take out a car loan (or any other type of loan), we all feel sure that we'll be able to repay that loan. But things happen. Jobs are lost, accidents happen, bonuses or promotions don't come through, suprise twins arrive -- people sometimes fall behind. With a traditional car loan, they can reposess your car and ruin your credit. If you have a home equity loan, however, they can do something much worse: they can still take your car and ruin your credit, but they can also TAKE YOUR HOUSE!

The interest that you can deduct from your taxes is small. I think this is not worthwhile for most people.

 

[Lisa loves Pooh]

Originally posted by MrsPete
NO WAY! When we take out a car loan (or any other type of loan), we all feel sure that we'll be able to repay that loan. But things happen. Jobs are lost, accidents happen, bonuses or promotions don't come through, suprise twins arrive -- people sometimes fall behind. With a traditional car loan, they can reposess your car and ruin your credit. If you have a home equity loan, however, they can do something much worse: they can still take your car and ruin your credit, but they can also TAKE YOUR HOUSE!

The interest that you can deduct from your taxes is small. I think this is not worthwhile for most people.

Based on this logic--no one would ever buy anything. They day we purchase our homes--there is always a risk that it will get taken away by lenders, by disasters, by any means. If OP's Home equity is so small that a small used call loan via Equity Loan would be this much of a burden--then of course don't do it. We've transferred auto loans to our home equity line no problem. But we've had plenty plenty plenty of room that if we ended up in an "Oh Grits" situation--we could sell our home before it got taken out from under us.

Different people choose their risk levels--if the risk is high that your house would get taken, then no don't get a HEL to buy a car. And if your risk level is high that you would be teetering payment to payment--then don't buy the car at all.

If your job is very very secure and you aren't planning on future undeclared bonuses and promotions as your clincher of affordability--then how you choose to buy your car is up to you.

A word on homes and mortgages--if your mortgage is with a credible lender/bank--there is no way that a late payment or missing one payment will put you on the street. In other words--if the unexpected happens...you aren't going to get kicked to the curb on the 2nd day of the month if you missed your payment on the 1st. In Florida--they can't even say your mortage payment is late until the 15th day it is late.

If your situation is that dire that this is a remote possibility for you--then I would agree with MrsPete--and would even dare say to not purchase the vehicle. But if your financial situation is beautiful--then there is no harm in trying to save your money and going the less expensive route.

OP--there are those that will try and scare you away from this--but only you know your financial situation and can decide. There is no right or wrong answer here as you have heard from both sides of the coin. Good luck in your decision.

 

[disneysteve]

Originally posted by MrsPete
The interest that you can deduct from your taxes is small. I think this is not worthwhile for most people.

This really depends on the amount of the loan and your own personal circumstances. Here's an example. A savings of 2.5% interest on a $15,000 loan for 5 years will save you $1,026.60 over the life of the loan. That isn't a huge amount of money to some, but it is to others. So you need to balance that against any risk, fees associated with taking the HEL, etc.

If you want to run the numbers, there is a good calculator at bankrate.com.