It is difficult for most of us to buy a car using just our personal savings. A loan is needed to meet the high purchase price of the vehicle, even more so if you are considering family cars such as SUVs and station wagons. There is always the option to head to the nearest bank and fill out a loan application form, but homeowners can also consider taking out a home equity line of credit or HELOC to buy a car. These two funding options have their advantages and disadvantages that you should carefully consider before you opt for one of them.

Getting a auto loan

For an auto loan, you can approach a bank, lender or car dealership. The borrowed money will have to be repaid over a specified time period. Based on your credit score, you will be charged a certain interest rate. Bad credit borrowers can also qualify for an auto loan as the car is the security or collateral in these loans. In the event of a default, the lender repossesses the car which is then sold at an auction. The borrower will have to pay the balance if the money from the sale is lesser than the borrowed amount. Under some laws, the borrower cannot write off the auto loan even through a bankruptcy filing.

An advantage of an auto loan is that it is offered at a fixed rate of interest, insulating the borrower from increases in prime rates. You can usually pay off an auto loan more quickly than a HELOC, in which the principal repayments are concentrated towards the end of the loan term. But the repayments on auto loans are not tax deductible, making them an expensive funding option.

Taking out a HELOC

Homeowners can use the equity in their homes to take out a HELOC or home equity line of credit to purchase a car. The term of a HELOC is anywhere between five to even more than twenty years. There must be equity built in your home to qualify for a HELOC.

An important advantage of such a loan is the flexibility it offers, as even after paying for the car, you will still typically have funds remaining that can be used for other purposes when the need arises. Another advantage of a HELOC is that the interest paid on it is usually tax deductible, unlike an auto loan. If you are taking out a home equity line of credit to buy a car, make sure you itemize the deduction to realize benefits.

The interest rates on a HELOC are usually variable, increasing your repayment amount if the benchmark rates see an upward trend. The total interest paid on such a loan is much more compared to an auto loan as the term lasts several years. Another disadvantage with a home equity line of credit is that if you default on your payments, you could end up losing your home, which will be a much bigger loss than losing the car if you default on an auto loan.