It may sound strange, but it is possible to purchase a car by using the money obtained from a home equity loan and you may end up saving a lot of money in the long run by doing so. Home equity loans compared to car loans are inexpensive sources of finance and also, they are a lot easier to qualify for. Thus, if you have equity left on your home and you are planning on buying a car, keep on reading.

A home equity loan has no specific purpose and thus can be used for purchasing anything you want or need. In this case, you can use the money to buy a new or used car and by doing so, you’d be reducing the interest rate you will pay for the money borrowed. Though car loan and home equity loan are both secured loans, the loan conditions of home equity loans are more advantageous.

Benefits Of Equity

Equity can provide a lot of benefits when you need to borrow money. Home equity constitutes better collateral than a car and thus the financial transaction backed up with home equity implies less risks for the lender. Thus, you will be able to obtain better interest rates and better loan terms like higher loan amounts, longer repayment programs and lower monthly payments while saving money in terms of interests at the same time.

Also, equity as collateral has less possibilities of destruction or damage compared to a car. Thus, the costs on insurance will be significantly lower. Anything that reduces the risk in the financial transaction pushes the interest rate down because the rate is the way the lender compensates for the risk that lending money entails.

Moreover, for the same reasons expressed above (the risk reduction on the loan transaction) the requirements for approval will be lessened. When it comes to credit requirements, truth is that as opposed to car loans, if you have equity left on your home you can obtain financing even if you have extremely bad credit, no credit at all or a bankruptcy on your credit history.

Disadvantages Of Using Home Equity Loans

The main problem of using your home equity for purchasing a car, is that the means are way above the purpose. It is just like using a bazooka to kill an ant. Thus, if you ever need to resort to this form of financing for other purposes like making home improvements or consolidating debt, you may find difficulties because you have already obtained a home equity loan for purchasing a car.

The other problem, maybe the most serious one, is that since home equity loans use the equity that is left on your home as collateral for the loan, you are risking repossession of the property if you even fail to repay it. It works just like mortgage loans. In the event of defaulting on the loan, the lender has the legal right to seize the property and sell it in a public auction in order to claim the money lent. Thus, you should make sure that you will be able to afford the monthly payments.