How Will a Home Equity Loan Affect a Car Loan?

When you apply for a car loan, an existing home equity loan could have an impact on your ability to obtain that loan. Lenders look at your existing debts and how you manage those debts before extending new credit to you. Additionally, you cannot take out a car loan unless you have sufficient income to pay both that new loan and your existing debt payments.

Credit Score

Lenders make regular reports to credit bureaus about your credit management. High balances and payments made more than 30 days late have a negative impact on your credit score. Since houses hold value better than cars, you can obtain a home equity loan with a lower score than the score needed to obtain an automobile loan. Therefore, even if you had good enough credit for an equity loan, you may not qualify for a car loan, and missed payments on your equity loan could jeopardize your chances of even getting a car loan.

Debt to Income

You only have so much money to spend each month, and lenders examine your debt-to-income (DTI) ratio to ensure that a new loan will not cause you to have more debt than you can afford. Your DTI reflects your debt payments as a percentage of your overall monthly income. Typically, lenders only allow you to obtain new credit if your DTI ratio does not exceed between 35 and 45 percent. A large home equity payment may not leave you enough spare cash to afford a car payment.

Existing Loans

When you have established your home equity loan and your car loan, how you manage one loan has no direct impact on the other. Your home equity lender cannot raise your interest rate or charge penalty fees if you miss a payment on your car loan or vice versa. As long as you keep to the terms of your loan agreement with one lender, a car repossession or home foreclosure related to another loan can have no bearing on that particular loan.

Variable Rate

Home equity loans have fixed interest rates, but many banks also offer home equity lines of credit that have variable interest rates and require interest-only payments. You may take out a car loan alongside your low rate equity line of credit and have no problem paying both of the debts. However, most equity lines have very high rate ceilings, which means that your payment could double or triple when interest rates rise. If that happens, your equity line of credit could soon have a big impact on your car loan if you cannot afford to pay both debts and must choose between protecting your home or your car.