New cars and trucks have become quite expensive over the years. Inflation only tells part of the story; a lot of the increase in price is due to technology. Air bags, antilock brakes, and computer systems that control everything have added to the price, too. On the plus side, cars perform better and more safely than they did a generation ago. Safer or not, cars are expensive, and buying one affordably is a problem that most consumers eventually face.
The most affordable way to buy a new car or truck is to take advantage of manufacturer-offered low interest rates, which can occasionally run as low as zero percent. Those rates, while generous, aren't offered very often and are generally available only to buyers with the highest credit scores. Otherwise, consumers are generally forced to use other, more traditional, lending options, such as bank loans or dealer financing. There is one other, and often overlooked, financing option that may work well for a lot of buyers - using a home equity loan.
A home equity loan is a loan that uses the portion of your house that you own as collateral. If you have a house that is valued at $150,000 and you still owe $100,000 on your mortgage, the remaining $50,000 is your equity. Lenders will issue loans to consumers using that equity as collateral, and there are some definite advantages for consumers who elect to do so:
Interest rates are more favorable - Interest rates for home loans are lower than those for either unsecured loans, such as credit card loans, or car loans. The rates can be several percent lower, saving the buyer quite a bit over the life of the loan.
The interest is often tax deductible - Interest on most home equity loans is deductible from Federal income tax, effectively reducing the interest rate for the borrower.
Buyers who consider a home equity loan for financing should be aware that they are putting their home at risk should they fail to pay off the loan. Lenders could potentially foreclose and sell the home to recover their money. Borrowers should also be careful to make sure that the repayment schedule for the loan runs about the same length of time as the buyer expects to own the car. Don't take out a loan with a ten year repayment schedule if you only expect to have the car for four or five years.
The rising price of houses during the last five years has left millions of Americans with substantial equity in their homes. If you are one of the lucky ones, you might wish to consider using a home equity loan to finance your next new car or truck.
