Back in 1909, you could purchase the first car, the Ford Model T, for $850. That's such a bargain, you could probably afford that out of your pocket! Unfortunately, that number doesn't take inflation into account, which means that if you purchased that same car now, it would cost $20,513 in today's dollars. (Not such a bargain after all.)
Because very few people walk around with that kind of pocket change, there's a good chance you'll be using a loan to finance your automobile purchase. A traditional car loan isn't your only choice - it may be worth tapping into your accumulated home equity instead. Here are four reasons why.
How low can rates go?
With mortgage rates at historic lows, you can open a home equity line of credit (HELOC) with a rate between 3 and 4 percent. National averages for car loans, on the other hand, are hovering in the 6 percent range. If you pay off your HELOC in the same length of time as you do your car loan, the lower interest rate means less money out of your pocket. One potential drawback: The auto loan rate will remain constant, while the HELOC rate will vary. If it heads higher, you may pay more interest during the term of the loan. On the other hand, if mortgage rates trend lower, you'll save even more money.
If you use a HELOC to finance your car loan, you're walking into the dealership with "cash." You'll have more bargaining power when negotiating the price of the car. The dealer has too much power when he knows that you're dependent on his financing, so having cash from a HELOC puts the power back in your pocket. You may also be eligible for a rebate if you pay full price up front.
Gifts from the taxman
There are zero tax perks when you use a car loan. However, the interest that you pay on a HELOC is generally tax deductible, but only if you itemize deductions. When Uncle Sam offers gifts, it's a good idea to take advantage of them.
Power of payment control
Most HELOCs require that you pay only interest during the first 10 to 15 years of the loan. Therefore, the amount of principal that you contribute is in your control. When you have extra money, you can pay down the principal early, thereby shortening the loan length, and reducing your total payments. There's a danger here, though - if you're not disciplined, you may fall behind on your payments, which may extend the loan's term and cost you more. You're also putting your home in jeopardy if you can't make the payments on time.
The Ford Model T may have been the most influential car of the 20th Century, but there's greater diversity in available models and features today. By mastering your financing options, you can purchase the car that's just right for you and pay for it the least expensive way possible.