Home Investment for Auto Loan Bad Idea

Some people think it is a good idea to keep all of their eggs so to say in one basket, and will use their home equity to pay for an auto loan, instead of taking out a separate loan. This is just not a good idea. The interest rate might look good, but you have to think about what you are linking the loan to, as well as the overall cost.

Many look at the fact that a home loan is tax-deductible and therefore they can use that money instead of paying someone more for an auto loan. However, you are attaching the car to your home. What happens if you cannot afford the car loan payment – usually they take your car. But if you can’t afford your home equity loan payment, they can take your home.

You also have to think in terms of the loan – you might have 10 or 15 years to pay off a home equity loan as opposed to a five year car loan. You are paying more interest in the loan for the car by putting it on the home, plus you probably won’t even have the car at the end of the home equity loan payments.

No matter how you run the numbers, you end up paying more for the life of the auto loan by putting it on your home. Your only other choice is to take advantage of the lower interest rate, but you would have to be strict with yourself and pay off the loan within five or less years in order to be able to get any benefit out of it. You could make extra payments and pay it off, but this is barring any unforeseen circumstances that might make that tougher to do. The smart thing to do would be to shop around for an inexpensive car loan, and leave your home out of it.
 

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