The Advantages of Using a Home Equity Loan to Buy a Car

Taking out a home equity to buy a new car can seem like a good idea, but there are a few drawbacks that any consumer who is considering this option should think about. While home equity loans can have lower interest rates than some conventional car loans, lower monthly payments, and can give the borrower the ability to take out more money than they otherwise would qualify for; they also require a borrower to take on a lot more risk, are harder to obtain, and can have long-lasting repercussions on a credit score.

The main reason that many people choose to take out a home equity loan to finance a vehicle purchase is because they believe that they will get a better interest rate, they can get a bigger loan, and/or that they can extend their payments. By doing this, they could pay less every month and get a bigger or better car.

A home equity loan is usually taken out at the same interest rates that mortgages are taken out for. Since mortgage interest rates are currently at record lows, there are many people who are taking advantage of these deals to make major purchases such as automobiles.

There are a lot of people who will even take out these loans as a way to finance a vehicle that they cannot get a conventional auto loan for. In general, a bank will prefer for a person's total transportation expenses to go no higher than twenty percent of his or her total salary. Of course, the exact amount varies between banks. Nonetheless, a home equity loan allows a person to borrow from his or her home's value, and home mortgage payments are usually capped around thirty three percent of a person's salary. Because of this a person can generally borrow more through a home equity loan than they can through a standard auto loan.

Finally, payments for home equity loans can be spread out over several decades. A conventional auto loan term is usually between three and seven years. By spreading out payments over a longer term, each payment is reduced. This means that a person could pay off a vehicle over many more years, giving them the ability to afford a more expensive car or truck than they would otherwise be approved for.

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Non-payment Implications
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