Should I finance my car with an auto loan or home equity loan? This calculator will help you find the better deal…
Should You Finance A Car With An Auto Loan Or Home Equity Loan?
If you're thinking of buying a new car then you have two financing options: a standard auto loan or a home equity loan.
Figuring out which is the best deal for your personal situation can be complicated.
Fortunately, this Auto Loan vs. Home Equity Calculator makes the math portion of the decision easy by showing you monthly payments, total interest cost, and more for each alternative.
Below we'll compare the features and benefits of home equity loans to auto loans so you can decide which is the best choice for your situation.
Related: 5 Rookie Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
Advantages Of Home Equity Loans
A home equity loan is a type of loan in which the borrower uses the equity in his home as collateral.
A home equity loan is usually used to finance large expenses like home renovations or car purchases. Home equity loans are generally preferred by consumers because they offer lower interest rates than standard auto loans.
Additionally, the interest paid on a home equity loan may be tax-deductible (depending on your situation); whereas, the interest paid on an auto loan is never deductible if the car is for personal use.
Disadvantages Of Home Equity Loans
Though home equity loans have many advantages over standard auto loans, there are important disadvantages to consider.
One disadvantage is that the interest rate charged on a home equity loan may be variable. This means your interest rate could suddenly rise if market interest rates increase. If you don’t have a buffer fund, this could possibly affect your monthly household budget by pulling money from other categories to make the higher payment.
Default on the loan is another concern. If you fail to make the monthly car payment for a conventional auto loan then your vehicle will just be repossessed. This may be inconvenient, but it's a normal, expected consequence.
However, if you default on your home equity loan payments, then you might be forced to sell your house since it is used as collateral for your loan. This is obviously a much more serious consequence.
Thus, before choosing choosing a home equity loan over an auto loan make sure you can afford the monthly payments throughout the loan term. You do not want to default on a home equity loan and risk losing your house.
Finally, another disadvantage of home equity loans is the higher processing fee and down payment that may be required compared to a standard auto loan. This can increase the cost of the loan partially offsetting the reduced interest rate advantage.
Remember, the lowest cost way to purchase a car is with cash. If you can afford to pay cash then seriously consider this as your first, best choice.
However, if you must finance, then it's usually a choice between an auto loan vs. a home equity loan. Each of these financing alternatives has advantages and disadvantages as described above.
Weigh your options carefully and be sure you understand the terms and conditions of your loan before making a commitment.
This auto loan vs. home equity calculator will help you compare options and figure which is best for your personal situation.
Auto Loan Vs. Home Equity Calculator Terms & Definitions
- Home Equity Loan – A type of loan in which the borrower uses the equity of their home as collateral.
- Auto Loan – A personal loan to purchase an automobile.
- Purchase Price of the Car – The amount you pay your car dealer. This amount is excluding federal and state taxes.
- Term – The number of months you need to pay your auto loan.
- Interest Rate – The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
- Auto Loan Interest Rate – Annual interest rate for the standard auto loan.
- Home Equity Loan Interest Rate – Annual interest rate for the home equity loan.
- Federal Tax Rate – Your federal marginal income tax rate.
- State Tax Rate – Your state marginal income tax rate.
- Sales Tax Rate – Sales tax percentage rate charged on this purchase.
- Savings Interest Rate – The interest rate paid on your savings when invested.
- Down Payment – The initial amount or the advance payment for your loan.
- Fees – Payment charged for title transfer. Also include any other payments that may be due at delivery.
- Home Equity Loan Closing Costs – Any additional costs to the home equity loan.
- Monthly Payment – The amount paid every month for your auto financing.
- Trade-in Allowance – The total amount that you are given for any automobile that you trade-in as part of your purchase.
- Amount Owed on Trade – Total loan balance still outstanding on the trade-in.
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