If you’re looking to purchase a car, the standard option for financing is definitely an car loan, but it’s also easy to finance your automobile using a home loan.
Using this method, however, involves vastly different considerations than a car loan. To begin with, your home is the collateral for a home equity loan, which may be a risky move if you get behind on repayment. In addition, there may be closing costs to pay for.
But home equity loans also provide some benefits. They sometimes offer more favorable rates of interest than auto loans and much more flexible repayment terms, with repayment stretched out as long as 10 to 15 years.
Here’s how to determine whether utilizing a home loan to purchase a car is the best choice for you.
Should I personally use my home equity to purchase a car?
Buying an automobile using home equity is a high-risk financing option that needs to be avoided if possible. While a traditional auto loan is secured by the car you buy, a home equity loan is secured from your home. That means the lending company can foreclose on your house if you can’t repay a house equity loan.
The repayment terms will also be completely different between the two types of loans. With a home equity loan, the repayment timeline can be as long as 10 to 15 years or even more. The stretched-out timeline means your monthly payments could be much lower compared to what they would be by having an auto loan.
However, it’s vital that you take into account that a car’s true market price depreciates at an accelerated rate. According to Edmunds, a new car loses 23.Five percent of its value after about one year and 60 % within the first 5 years.
If you buy a car using a home equity loan, which could offer repayment relation to ten years or even more, you’ll pay for any vehicle that’s not even worth credit amount anymore. A longer repayment timeline will even imply that you’re paying more interest overall for that purchase than you'd with a shorter auto loan.
Pros and cons of using a house equity loan to buy a car
Although a house equity loan is one choice to purchase a car, there are several things to consider prior to going this route. Here are some of the biggest benefits and drawbacks of buying a car utilizing a home loan.
Most auto loans are for any set duration of three to seven years, but a house equity loan typically gives you a longer time to repay, generally between 10 and 15 years and often longer. With a home loan, you can also typically pay the loan off early, which isn't the case with many automotive loans.
Lower interest payments
Home equity loans normally have lower interest rates than automotive loans, which could help if your budget is tight. For those who have good credit, you may be able to find hel-home equity loans with rates as low as 3 %.
Longer repayment terms
The longer repayment timeline of the home equity loan will decrease your monthly payments, however the loan could also outlive your vehicle. This could lead to you'll still paying your house equity loan for that old vehicle while financing a brand new vehicle.
Decreased home equity
Using your house equity to finance an automobile decreases the amount of equity available for you in your home. This is often a problem if you need to sell your home before you’ve paid the borrowed funds back. That could lead you to become inverted on your mortgage in case your home value decreases to the point that you simply owe more about your mortgage and also the home loan than your property is worth.
Some home equity loans incur up-front settlement costs in addition to the interest you’ll pay within the loan term. This means that even if you obtain a lower interest rate than you would with an car loan, a house equity loan could cost you more income.
Risk of foreclosure
If you’re unable to maintain payments, the lender sell your home to recoup the debt that you owe.
The bottom line
It can be done to apply your home equity to take out a loan for any car, and you may get a better interest rate on your loan if you take that route. However, before you decide to move ahead, think about the risks of using your home as collateral and also the drawbacks of choosing an extended loan. You might not wish to carry debt any more than you need to, specifically for a car.