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Don’t
Mortgage Your Home Yet
Some people think that
the smartest thing they can do is take out
a home equity loan to finance their car,
instead of getting a car loan. There are
several reasons why that is not a good
idea. For starters, why would you take out
a 10 or 30 year loan on a car that you
might have five? But this is exactly what
people do.
It became very popular for people to take
out these kinds of loans once they saw
that they could get lower interest rates
as well as the fact that the interest is
tax deductible, but unless you pay that
loan off in five years or less you are
gaining absolutely nothing. Statistics say
that last year roughly 24% of homeowners
used the equity in their home instead of
getting an auto loan. Some took out the
loan for the car as well as other things
in their home that they wanted to improve,
but 8% took it out just for the car.
The payments may be less, but you have to
pay more in order for it to be beneficial
for you. You end up paying more interest
over the life of the loan because it is
such a longer term, than if you had just
gotten the five year auto loan from the
dealership or bank. Then there is the fact
that ten years later you are still paying
on a car that you might not even own any
longer – and where does that get you -
still paying for the old car, while
probably paying for a new one as well.
For example, let’s say you finance $30,000
for a new car. If you take out the auto
loan at the dealership you pay 7.76%,
which makes it $6,291.11 in interest over
the life of the loan. However, let’s say
you take out an equity line of credit to
pay for the car, over ten years you would
pay 7.88% and $6,417.71 in interest if you
made extra payments for the first five
years. Add in the amount that you deduct
and you end up saving $1,356.03 in
interest, which is a good deal.
But if you don’t itemize the tax savings,
and you don’t make the extra payments, you
would end up paying $13,450 in interest,
which would be more than $7,000 more than
the auto loan. Best advice? Get the car
loan from the dealership if you aren’t
structured enough to pay it off early.
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