Posted on January 24, 2013
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Home Equity and Auto Loans
Learn About Home Equity Lines and Loans
Home Equity Lines and Loans
Home equity loans are loans in which the borrower's home is used as collateral. The loans are often used for major expenses such as home renovations, college education, or medical expenses. The loan reduces the borrower's equity in their house and is generally paid monthly like a mortgage payment.
Types of Home Equity Products
There are two main types of home equity products, home equity loans and home equity lines of credit. A home equity loan is a one-time, lump sum loan given by the bank with a fixed rate of interest. It is similar to a fixed rate mortgage loan. A home equity line of credit is a revolving credit line which the borrower can draw down when needed. The lender sets the upper limit of the credit line depending on the equity available in the borrower's house and the borrower's credit history. For many banks, the limit of a home equity loan or line is the borrower's equity in their house, minus any liens.
Advantages of a Home Equity Line or Loan
There are several advantages to using a home equity loan or line as a financing tool. They include:
- Rates that are usually lower than credit cards because the loan or line is secured with collateral (the borrower's house).
- Generally no points, closing costs, and processing fees.
- Tax deductible interest
Disadvantages of a Home Equity Loan
- Home equity lines and loans borrow against the equity in the house.
- In this way, they reduce equity that a homeowner may have spent years in building.
- The line and loan is collateralized by the borrower's house.
- If the borrower defaults on their loan, the bank can seize the house.
Auto Loans
When purchasing a new or used car, a buyer has the option of paying cash for the vehicle, or borrowing money to finance the purchase. Often, if financing is used, the buyer is required to put some money down, and then borrow the rest of the funds. Lenders include dealer related financing, banks, and credit unions.
Dealer Financing
We've all seen ads for 0% dealer financing on television. While these rates are available, they often come with difficult terms that are hard for many car buyers to meet. For example to get the 0% financing, buyers must have extremely good credit (credit score above 680), and they must accept a short term loan of 24 to 36 months as opposed to more common 48 or 60 month terms. Usually, buyers have a choice of a dealer financing offer or a cash rebate, not both. Buyers have to run the numbers to determine which one is the better deal. Usually, it's better to take the cash rebate and finance elsewhere.
This calculator at Edmunds.com can help you determine if the dealer financing rate or the cash rebate is a better deal.
Bank and Credit Union Financing
If you decide to go with the cash rebate, or can't get a good rate from a dealer, then a bank or credit union is often a good place to go for auto loans. Credit unions in particular often specialize in auto loans and have competitive rates. Loan rates from financial institutions are determined by a variety of factors including your credit rating, the length (term) of the loan, whether the car is new or used (new car loans have lower rates than used car loans), and your geographic location.
Home Equity Loan for Financing Car
Some homeowners decide to get a home equity loan to pay for their car. The advantage of this is that home equity loans, which are secured by real estate are often easier to get then standard car loans. While car loans have maximum terms of 60 months, home equity loans can be 10 years or longer, allowing the buyer to stretch the payments and significantly reduce the monthly payment. There are several disadvantages to using a home equity loan to pay for a car though. Generally, the rate is higher and the term is longer, resulting in significantly higher interest payments. Using a home equity loan to pay for a car, also ties your home to the car. If you miss a payment, you can lose your home. In general, if you can't finance a car with a standard car loan, then you should perhaps look to buy a less expensive car or a used car.
