It’s Valentine’s Day, and you’re in love….with a $25,000 new car! You want to bring her home ASAP but don’t have the ready cash. Should you take out an auto loan or borrow against your home equity? The answer might surprise you.
The Car Loan
The average rate on a six-year car loan is pretty low these days — about 4.5 percent (check rates at LendingTree Autos). If you finance $25,000, your monthly payment is $397 a month, and you’ll pay $3,573 in interest over that six year period. That’s not a bad deal.
The Home Equity Loan
But…nestled amongst the junk in your mailbox is a shiny brochure with a gee-whiz font and a lot of exclamation points!!! It promises big savings — finance $25,000 and pay just $145 a month! Get a 3.5 percent rate! Well, duh — who wouldn’t want to save over $250 a month?
Maybe you. Remember, the big print giveth, and the fine print taketh away.
Fixed or Variable?
Get out your reading glasses and see what that 3.5 percent rate involves. Home equity loans and home equity lines of credit (HELOCs) can carry fixed or variable rates. And they may have introductory or teaser rates, which may apply for only a few months. A 3.5 percent fixed rate is obviously better than a 4.5 percent fixed rate, but a 3.5 percent rate that can adjust upward may not be ideal.
Once you’ve done your homework and found that the home equity loan you’re being offered has a fixed rate, should you take it? Not so fast.
What About the Fees?
Next, check out the fees. Home equity loans typically carry pretty low fees, but you can probably expect to pay a few hundred dollars for a home appraisal, a credit report, and maybe some lender charges. Auto lenders can also add charges to the loan’s costs. A loan APR calculator can help you make the comparison.
To do it properly, input the auto loan’s amount, rate, charges and term. For example, a 4.5 percent loan, $100 in fees, a $25,000 loan amount, and a six year term. You get an APR of 4.638 percent. Next, the home equity loan, with a 3.5 percent rate, $750 in fees, and (this is important!) the same six year term (even if the home equity loan could be paid over 20 years, don’t use this figure). Your APR is 4.515 percent. The home equity loan is cheaper.
But Wait! There’s More!
Unless you want to spend 20 years paying off your car, and pay thousands more in interest, you can’t make that $145 monthly payment. Check out this chart, which shows you how the length of time you take to pay off the home equity loan influences its cost and your monthly payment. Choose a payment that’s workable, yet minimizes the amount of interest you pay over the life of the loan.
|Loan Amount||Rate||Years||Payment||Total Interest Paid|
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