Many people take out home equity loans, also known as second mortgages, to pay for home repair or remodeling projects. However, you can pull the money out of your home and pay for a variety of other items, such as medical bills, college expenses, or even a car. Learning the pros and cons of taking out a home equity loan to pay for a car instead of getting traditional financing can help you decide if it is ideal for you. Here are some of those advantages and disadvantages.
Cons of Taking Out a Home Equity Loan to Pay For a Car
- You're Risking Your Home
One of the biggest downsides to using a home equity loan to purchase a car is that you are risking your home. If you find yourself unable to work or lose your job, and can't afford the second mortgage payments, a lien can be placed on your home or your home could even be foreclosed on.
- You're Taking Away From Equity You May Need Down the Road
The other disadvantage to using a home equity loan to pay for a car is that you are taking away from equity you may need later on. If you take out a home equity loan and purchase a vehicle with it, and then later need money for a home renovation or repair, you may not be able to get the money you need out of the equity of your home because it is tied up from when you bought the car. If you plan on doing any renovations or home repairs, and using your equity to finance it, avoid taking out a home equity loan for any other reason.
Pros of Taking Out a Home Equity Loan to Pay For a Car
- The Interest Rates are Fairly Comparable
One of the benefits to taking out a home equity loan is that the interest rates for a car loan and home equity loan are fairly comparable. And if you have bad credit but a lot of equity in your home, you may find that you can get a higher loan or better payment terms by taking out a home equity loan versus an auto loan. As such, you may want to compare the price of an auto loan and home equity loan if you need a vehicle and are positive you can pay the loan back.
- You Have Longer to Pay Off the Loan
The other major advantage to taking out a home equity loan to pay for a car is that you typically have a longer period to pay off the loan. Home equity loans can have a life of 15 years. Car loans are often much shorter. Yes, you will pay more in interest if you spread the loan out over a long period of time. If money is tight in your household, yet you need another vehicle, taking out a loan for a longer period of time may help you afford that vehicle as your monthly payments will be smaller.
A home equity loan allows you to use the equity in your home to fund other items. Learning the pros and cons of paying for a car with a home equity loan will help you decide if it is the best way for you to use your equity. For more information, contact companies like TruPartner Credit Union.