Today I have a rather new topic in mind to discuss and while it is not one that we have experience with in our household as of yet, some of my friends have brought this issue to my attention on several occasions. The subject matter I am referring to is what can you do to secure a car loan with bad credit. While there may be some suitable options, the method I want to shed some light on today relates to using a home equity loan to buy your car. Who may be the ideal candidate for this type of loan, you ask? Home owners who have got themselves into a bad credit situation and might find it necessary to use their house as collateral in order to pay for a car loan – that’s who.
In this case, essentially what you are doing by taking out a home equity loan or a home equity line of credit is taking out a second mortgage. Many use this for debt consolidation purposes too. Home equity options may be a better financial option than securing financing directly through a dealership or a bank and may help you to avoid being turned down for a loan because of bad credit. There are definitely some benefits to this type of loan, please read on to find out if this is a good option for you.
Benefits
Pay Less Interest
The interest rates on these home equity loans are likely to be much lower than those from dealerships and other auto credit sources. This is especially so for those with bad credit. If you have ever tried to secure a loan with poor credit, on those occasions when you were successful, the loan was very likely to come with higher interest. The terms associated home equity loans are also typically more favourable to the borrower. Even securing an interest rate of 0.5 percent less is highly beneficial as this additional percentage can add up to hundreds of dollars in interest over a 4 or 5 year period of time.
Bargaining Power at the Dealership
When you obtain an equity loan, before you approach the dealer, you can come armed with the funds to negotiate the financing terms. This is often the case because you may be able to receive a promotional rebate that allows buyers to have better terms, if they pay the full cost of the vehicle upfront. If you have come prepared to pay the full amount, you may be able to take advantage of this offer, reap the benefits of your home equity loan and not have your bad credit interfere with the purchase in any way.
Saving on Taxes
When you take out a loan on your home, the funds you will repay can also be tax deductible. This can mean that you can again save several hundred dollars over the loan term. This is of course determined on an individual basis and depends on your personal tax bracket, your ability to pay of the loan within the given term, and on your interest rate. There are some limitations surrounding these deductions, for example it is typical that only taxpayers who take these loans out on their first or second home are eligible for these interest deductions. So looking into this is important.
This blog of course, would not be complete if I didn’t also look at the risks that can be associated with this type of loan.
Risks
Rising Interest
Along with all of the positive things I have mentioned about interest, there can also be some downsides. Unlike a car loan, a home equity loan may not always have a fixed interest rate, meaning that the rate can increase over time. As these rising interest costs can be quite high, this can mean that you could run into problems down the line and not be able to meet the the terms of the loan.
Closing Costs
While the benefits of securing a home equity loan may be effective once you have received the funds, there are some upfront costs that you will be required to pay. When setting up the loan, you may be expected to buy a private mortgage insurance package. Sometimes these amounts may negate the amount you will save in interest and might not end up being suitable for you situation.
Putting your Home on the Line
One major consequence of taking out a home equity loan can mean that you may have to sell your home down the line. While this is more of a worse case scenario, it is important to be aware that this can happen if down the road, you default on the loan. While it may not actually come to this, another negative outcome that can occur is in the event you can’t make your car loan payments, your vehicle could be repossessed.
The Bottom Line
While there are both positive and negative aspects of taking out a home equity loan, with the right amount of discipline and foresight this can be an effective way to secure the car loan you need. With bad credit, you will especially want to make sure you can make your payments, without falling further into debt.
Ultimately, everyone will want to weigh the pros and cons of a home equity loan for themselves and base their decision on their personal situation and their finances. Overall, I am glad I have taken the time to examine this topic further. I hope this can help my friends who are considering this as an option for their families. It is comforting to know that this may also be an option for us down the road if we need to purchase a vehicle and are unsure whether we can secure the necessary funds. Once again, it is always great to have options!
