Using Home Equity Line To Pay For Car
REM #F666
By Ilyce R. Glink
Summary: A home owner got an auto loan with the plan to use their home equity line to pay it off. Now it turns out the auto loan rate is lower than the home equity rate. Ilyce advises to always keep the lower rate loan.
Q: We took a dealer/bank loan on a new vehicle, intending to pay it off with
our credit union home equity line of credit.
But something weird happened. Our home equity line of credit (HELOC) interest
rate floats. It’s currently at 7.84 percent. On the other hand, our car
loan is fixed at 5.75 percent, with 57 payments remaining at $730 per month.
Is it wiser to stick with the car loan or pay it off with the higher HELOC?
A: I don't think it's ever a good idea to pay off a less expensive loan with
a more expensive loan.
If you're paying nearly 8 percent on your home equity line of credit, but your
car loan is fixed more than 2 percentage points less than that, you'd have a
hard time convincing me that it's a better choice to pay off the car with more
expensive money. Your monthly payment may be higher on the car loan, but you
are paying less interest on the money borrowed.
Even if you itemize on your federal income tax return and can write off the
interest you pay on the car, you probably would just break even in terms of
the two loans – and most people don't write off interest. They just take
the standard deduction.
In short, it's a far better deal to keep the car loan. Just make the commitment
to pay it off as quickly as possible as cars, unlike houses, typically depreciate
in value.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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