Buying new vehicles can mean undergoing a tremendous financial hit when it comes to depreciation, with new cars losing an average of 11 percent of their MSRP value as soon as they're driven off the dealership lot. This can make it difficult to trade in your now gently-used vehicle for a newer one without bringing a large sum to the table. If you'd like to pay off your existing auto loan so that you can sell your vehicle for another one (or simply want to eliminate what can often be a high-interest short term loan), should you seek credit from your home? Read on for some of the factors you'll want to consider when deciding whether to pay off your current vehicle loan(s) with a home equity loan or line of credit.
What interest rates are being offered?
For consumers with good or excellent credit, refinancing your existing auto loan into a lower-rate loan can often leave you paying less in interest over time. On the other hand, those with just fair credit may not be able to qualify for auto loans at a rate lower than that being offered on home equity loans or lines of credit, making refinancing a poor option. You may want to solicit a few refinancing quotes to see what interest rates are available and whether your home equity loan or line of credit comes out on top.
How much equity do you have in your home?
Unless you live in a city with rapidly-rising prices, you'll only be able to borrow a certain amount of your equity -- the Great Recession largely put an end to the days of 100 percent home equity loans due to property values plummeting across the U.S. If taking out a $10,000 home equity loan would put your debt-to-value ratio at more than 80 percent, you may find yourself facing a fairly low loan limit.
Can you truly afford a new vehicle?
Putting your auto loan on your home equity line of credit (or taking out home equity to pay off this loan) essentially involves the transfer of debt from a depreciating asset to an appreciating one. Because of this, it's important to ensure that any new vehicle you do purchase is truly affordable to you. Job loss or unexpected expenses that leave you unable to make your home equity loan or line of credit payments could subject your property to foreclosure.
For more information about home equity loans, reach out to lenders like General Electric Credit Union.Share