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When to Use, Not Use Home to Finance Auto

Shaffer: Using home equity for car carries risk

Oct. 19, 2015

By RICK SCHAFFER Boston Herald - Tribune News Service

We're into October, which means it's the time of year when car-buying ramps up as new models flood dealer lots.

If you're in the market to buy a new vehicle, and you're a homeowner, one question you may have is: Should I use a home-equity loan (HEL) or home-equity line of credit (HELOC) to finance the purchase of the vehicle?

You may, as many do, assume this is a good idea because, in most cases, all or most of the interest on the home equity financing is tax-deductible, and the interest rates are likely lower than those available on a car or truck loan, especially if you're purchasing a used car or truck.

However, using home-equity products to buy a vehicle is risky.

First, and most importantly, rather than having the loan secured only by your car or truck, the loan will be secured by your home.

Moreover, there is a tendency for people to stretch out the repayment of the debt from buying the vehicle over the entire term of their HEL or HELOC, which is generally 10 to 20 years, instead of repaying that debt within the time you should pay off a car or truck loan, which is three to four -- or at most five -- years. By stretching out the repayment time, you end up defeating the benefit of using your home equity loan for the purchase of the vehicle.

Finally, there is a tendency -- because there is often more money available to you -- to purchase a more expensive vehicle using a HEL or HELOC than you would have if you paid cash or used a traditional car or truck loan to finance the purchase.

So, bottom line, when is it OK to use a HEL or HELOC to purchase a vehicle? Only if and when all the following are true:
  • You can't afford to pay cash for the vehicle.

  • You can't get low interest rate financing through the car dealer or from a bank or other lender.

  • You don't end up buying a more expensive vehicle than you can realistically afford because you have easy access to the home equity loan funds.

  • You promise yourself that, and you're certain that, you can afford to repay in full the portion of the home equity loan used to purchase the vehicle within, at most, 4 to 5 years, and preferably 2 to 3 years, in addition to paying the monthly amount you already were paying on that HELOC.

Rick Shaffer hosts "Biz$mart" weekdays from 4-6 p.m. on Boston Herald Radio.

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