Should You Finance A Car With An Auto Loan Or Home Equity Loan?

When it comes to financing a new car you can choose to get an auto loan or you could actually choose a home equity loan.

Which one is going to be the best option for you? Well, that can sometimes be difficult to figure out.

We’re going to help you a bit with the math so you can find out more about your monthly payments and you’ll definitely be able to figure out the best plan for you.

We’re also going to look at the different features that go along with both an auto loan and a home equity loan, so you can see what works best.

What is a Home Equity Loan?

A home equity loan means that you’re going to use the equity that you’ve built into your home in order to get money you can use for other things.

In fact, you can use the money that you get from this type of loan for practically anything that you want. And you may even be able to deduct any interest from your taxes.

You won’t be able to borrow the full amount that you have built up in equity, but you should be able to borrow up to 85% of the value of your home.

Now, in order to find your equity amount you would take the amount that your house is actually worth and then subtract the amount that you still owe. A home worth $400,000 that still has a mortgage of $300,000 has built up equity of $100,000. From there, you would get cash as your loan amount.

It’s important to note that a home equity loan is essentially a second mortgage on your home. That means you have the normal mortgage but now you’re going to have to pay back a lien on your home. And you may not have the same low interest rate as the first time. Still, it may be a good option for some because it doesn’t require you to actually refinance.

How a Home Equity Loan Works?

If you’re looking to take out a home equity loan you’ll want to look at the options available here.

First, you can take out a full amount in cash right up front. If you do this you’ll have to make monthly payments at a fixed rate and you’ll set an interest rate when you borrow the money. You won’t have to worry about changes to the interest rate and you’ll just make a payment to lower the balance every month.

The other option is a HELOC or home equity line of credit. This means that you can set up a large amount that is available and then you can choose to borrow as many times as you want and whenever you want up to that total amount. Then you make smaller payments toward the beginning and you’ll have to start making full payments later on.

If you’re looking to control the amount you borrow, have more freedom of when and how much to borrow and pay less interest then you’ll want to look into a HELOC.

How Do Car Loans Work?

Now, a car loan is actually quite simple. It’s a personal loan that’s used to purchase a vehicle.

So, you take out a loan from a lender, they give you some money and then you agree to make the payments every month.

Those payments will help to pay back the amount of money that you owe on the vehicle. And you’re going to pay some interest.

Now, when you take out a personal loan in most cases it’s considered unsecured. That means that if you default on the loan the lender has to come after you to get the money.

With a car loan, however, it’s a secured loan because the vehicle is the collateral. If you default on the loan the lender will take your vehicle. Then they sell the vehicle in order to get their money back.

With this type of loan you’re going to get a single large amount in order to pay for the vehicle. Then you’re going to start making moderate payments back to the lender that include interest.

You get to work with them to decide on the length of time that you’re taking the loan for, how much you’re going to take out and what the interest rate will actually be.

It means looking at three things:

  • The amount of the loan. This is how much money that you need to pay for the vehicle in order to get it from the dealer or whoever you’re buying from. This is less the amount you already have for a down payment or trade-in.
  • The interest rate. You may or may not have a lot of say or control over this but it’s the amount of the interest you’ll pay each month on the loan.
  • The length of the loan. This is where you’re going to set up just how long you have to pay the loan back. It’s generally somewhere around 36 – 72 months (3 to 6 years)

Benefits of Home Equity Loans

Here are the main benefits of using home equity loan:

  • Low Rates – When it comes to a home equity loan you’re generally going to have a lower interest rate to deal with than you would with a credit card or even a personal loan. Known as an APR, this is one way that you can decrease the costs of your loan. On the other hand you may pay a bit more in closing costs.
  • High Amount – You’ll be able to get as much money as you want (for the most part) and you can access it as a single, lump sum. You can also use it for whatever you want including debt, large purchases and more.
  • Nothing Upfront – You don’t have to pay for application fees and you don’t have to worry about a lot of other fees either. This can make it even more convenient for you to use the money and then pay it back.

The Risk of Home Equity Loans

Now, there are some downsides to home equity loans and the main one is the fact that these loans can be extremely easy to get.

They can also be extremely easy to take money out and spend it. As a result, you can end up sinking further and further into debt.

That’s because when you take money out and spend it you then have to pay it back, but you can also borrow even more money and more.

Every time you pay off a portion of your house you have even more money available to take out, which gets people in even more trouble financially.

Benefits of Auto Loans

  • Get it Now – You can get a car loan and immediately get that vehicle, just like that. And you can get something that is much better than what you could get on your own.
  • Simple Process – Applying for a loan is extremely simple. You don’t have to fill out a lot of paperwork and you don’t need to worry about how long it takes to get the loan. You can do it all quickly and easily and get the loan you want from just about any bank or other financial institution.
  • Fixed Terms – You don’t have to worry about the interest rate changing on you because you get a single, fixed rate for the entire length of the loan. If you have a shorter-term loan then you pay less interest over the life of the loan. But it could mean you pay a bit more from one month to the next.
  • Improve Your Credit – This type of loan can help you improve your overall credit rating and credit score for future needs.

The Risk of Auto Loans

Now, that’s not to say there’s no risk to this type of loan. You still have:

  • Getting into Debt – You’re eventually going to have to pay the loan off and the longer it takes you to do this the more you’re going to end up paying in interest.
  • Interest Rates – Speaking of that interest rate you’re going to have to pay for the privilege of getting that loan, which means you pay interest.
  • Rigidity – You don’t get any kind of flexibility once the loan is set up. Once you agree to the terms that’s what you need to follow until the loan is fully paid off.