Twenty-four percent of homeowners used a home equity loan -- line of credit secured by real estate -- in a 2006 survey by Synergistics Research Corporation. Buying a car using funds from a home equity loan might save thousands in finance charges, but the borrower could lose his car and home if he defaults. Overall, a regular auto is usually the way to go.
Identification
Home equity loans (HELs) are a lump sum of money usually at a fixed rate and set repayment schedule that a borrower gets by using his home as leverage. This is not the same as a home equity line of credit, which has a variable rate and offers interest-only payments. If the borrower defaults on the HEL, he can lose his house should the creditor sue for the debt. At the very least, the lender can prevent the sale or transfer of the home.
Disadvantages
Since property secures the HEL, lenders usually offer lower rates than one would find on a car loan. However, most HELs have a 10-year repayment plan, so the borrower could pay more with a lower interest rate because of the long life of the loan. Most car loans last three to five years. Also, this type loan often has a higher origination fee than a car loan.
Benefits
The longer life of the HEL usually means lower monthly payments than on an auto loan, and if the borrower repays the loan early, he can avoid the extra finance charges. The borrower may also qualify to deduct the interest on the loan. How much the mortgage interest deduction saves depends on the borrower's tax bracket. With an HEL at 6 percent and a borrower in the 25 percent tax bracket, for example, the effective tax rate is 4.5 percent. Taking out an HEL does not automatically qualify a taxpayer for a deduction. Renting out a home, for example, could disqualify one from using the deduction.
Tip
Consumers should always consult a professional if they plan to use the mortgage interest rate deduction to lower the cost of a car loan. In general, however, car loans are usually the cheapest way to finance a car, according to financial expert Don Taylor of Bankrate.com. However, consumers should calculate the cost of all options. Some websites, such as LotPro.com, have calculators comparing the cost of a car loan versus a home equity loan.
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