Buy a Car With A Home Equity Loan?

No matter how often you change the oil, flush the radiator or replace the hoses and belts, eventually your ride will go to car heaven – or an owner more patient with hassles. With new car prices averaging around $30,000, you may have to borrow to stay on the road.

If you’ve owned a home long enough to build up some equity, you have a choice: a car or home-equity loan. Deciding which is best involves more than comparing interest rates. On close examination, many car buyers might find a home equity loan is better today, especially if they are willing to take some risk with a floating-rate line of credit rather than a fixed-rate installment loan.

Today, the average five-year new car loan charges about 5%, according to the BankingMyWay.com survey, while the average five-year home-equity installment loan comes to around 7.3%.

At first glance, the car loan appears to be a better deal, but it really depends on your tax bracket. Most homeowners can deduct mortgage interest payments on their federal tax returns, and that includes interest on home equity loans. A car loan, whether from a bank or dealer, is not deductible.

So how do you compare the two types of loans?

The easiest way is to convert the home equity loan to a taxable-equivalent interest rate.  At 7.3%, every $100 you borrow costs $7.30 a year. But the tax deduction on that $7.30 reduces your tax bill, so you’re not paying much.