Could using your home equity as your auto loan provide you with some extra gas money?  For many homeowners, the answer is yes.  Because many people frequently overlook this huge asset in which they reside, they end up spending thousands of dollars more in interest and finance charges.  However, using a home equity loan (HEL) to finance your new car purchase is not entirely risk-free.  Thus, a clear understanding of what exactly the process entails is necessary to avoid becoming a victim of a financial hit-and-run.

The most obvious feature of any loan is the interest rate and rightly so.  A lower interest rate will, indeed, lower the amount added to the cost of financing your vehicle purchase.  Another factor to consider is that the interest paid on a HEL  may be tax-deductible.  (You should check with your tax preparer for full details.)  Moreover, the monthly payments on a HEL [insert link to home equity rate tables] can be lower than those on an auto loan because of HELs typically have longer terms than auto loans.  Instead of paying back your balance over 5 to 7 years, a HEL allows you 10 to 15 years to pay it back.

However, interest is not everything in choosing a loan to use; there are a number of other factors to consider and one such factor is the additional fees that are added to your loan.  These can come in the form of finance charges or closing costs.  In either case, your main objective should be to keep these as low as possible.  In fact, according to a 2004 report, the Consumer Federation of America found that exorbitant “finance markup charges” that were set arbitrarily added at least $1,000 to the cost of auto loans which cost consumers up to a billion dollars a year (Source: National Consumer Law Center).

Like most questions concerning money and finance, there is no single, definitive answer that works for everyone.  Deciding whether to take out an auto loan or a HEL depends on the interest rates and various promotional offers available.  When you finally decide to treat yourself to that new ride, remember to consider the aforementioned factors to help you appropriately weigh your options.  Doing so will have you sliding into those comfy bucket seats, pressing that pedal to the medal, and leaving any financing doubts or regrets in the dust before you know it.

Source: Informa Research Services