Buying a car may not be feasible using just personal savings; a car loan or home equity line of credit (HELOC) could provide the answer to this funding issue. Borrowing money isn't cheap, particularly if a bad credit rating exists. However, a HELOC loan or car loan does mean that a vehicle can be purchased straight away and this is often essential for those who don't live in close proximity to their place of work.
HELOC Loans
A home equity line of credit is an interesting variant to the better-known home equity loan. Instead of being advanced a pre-defined sum of money, a homeowner is provided with a line of credit- similar to a credit card, but at a more favourable rate- that can be used at any time. The term of the 'draw period' is typically between 5 and 25 years. Unlike a car loan, the interest is accrued at a variable, rather than fixed, rate.
Car Loans
A car loan is simply a means of borrowing money (the principal) over a defined period of time in order to purchase a vehicle. Buying a car is possible for those with a bad credit rating because the car is used as collateral. Should a borrower default on the agreement, the creditor can repossess the car and sell it at auction. The debtor remains responsible for the difference between the sale price and the amount owed. Filing for bankruptcy cannot write-off a car loan under current laws.
Home Equity Line of Credit Vs Car Loans
- Interest calculations. Borrowing money through a home equity line of credit (HELOC) will attract a variable rate of interest. If interest rates increase, monthly repayments could become less affordable. Car loans are available at a fixed rate of APR which provides certainty.
- Repayment period. A home equity line of credit can last for anywhere between 5 and 25 years. This could mean that the source of borrowing lasts longer than the vehicle. The principal doesn't become repayable until the end of the term.
- Home equity. Unless home equity exists, buying a car with a HELOC loan will not be possible.
- Tax deductible. Interest payments on a HELOC loan are normally tax deductible, whereas car loan repayments aren't. This makes the latter a more expensive means of borrowing money. In order to benefit, it is important to itemize this deduction on the tax return.
Buying a car is easy with a home equity line of credit as it provides a homeowner with greater flexibility. HELOC loans offer lower monthly repayments and are tax deductible. Borrowing money with a car loan ensures that home equity isn't eroded and any money borrowed is paid-off more quickly.
Sources
Bucci, Steve. (May 18, 2009). "Pros, cons of paying car loan with HELOC." The Boston Globe.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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