Q. I’m thinking of paying off my car loan with a home equity loan. The rate on the equity loan is better and I know it’s tax deductible. What are the pros and cons?
— Behind the wheel
A. It’s common to borrow to buy a car, but it’s a losing proposition.
Unlike a home, a car will lose tremendous value the moment you drive it off the lot — yet you’ll still be stuck with a full price loan to pay down.
Home equity loans or lines of credit offer tax deductible interest, so that seems like a huge draw. But the flexibility of home payments means you may be stuck paying for the car for far longer than you own it.
The amortization of most home equity loans is between 15 and 25 years, said Debra Morrison, a certified financial planner with Empowered Retirement in Lincoln Park, N.J.
“Unless you will be disciplined to repay an equal dollar payment to your home equity loan that you otherwise paid to the car loan repayment, you’ll be extending indebtedness for a hugely depreciating asset, your car,” Morrison said.
To that point, the amount of loan interest that is otherwise deductible is minimal, she said, especially given the long-term amortization of a home equity loan.
“When the monthly home equity loan statement shows your minimum payment, there may be a temptation to begin paying just that lower payment amount, hence I recommend resisting the temptation and continue to pay your car payment, on schedule, thus leaving your home equity loan available for larger opportunities, preferably for appreciating asset investments,” she said.
Before you apply for any loan, it’s smart to know where your credit stands, since that will determine your interest rate. You can get your free annual credit reports at AnnualCreditReport.com and you can check your credit scores for free every month on Credit.com.
More on Auto Loans:
- Are There Car Loans for People With Bad Credit?
- What to Do If You Can’t Make Your Car Payments
- Top 5 Worst Car Buying Mistakes