Did you know that you can use your home loan to buy a new car?
If you have been in your home for a while, you likely would have built up some home equity and you may be able to use this to provide low-interest funds for a new car purchase. As attractive and easy as this may seem, I would recommend you do the numbers first to get a long-term estimate of the total interest you will be paying if you attach the car finance to your home loan.
Let’s do some numbers…..
30 year home loan + Car purchase:
Bundling in a car loan of $30,000 with your $500,000 home loan @ 2.7% interest can mean paying as much as $13,804 more in interest over the term of the home loan. Of course, you can reduce the overall interest if you can make extra payments.
Car finance:
For a personal car loan of $30,000 @ 5.95% interest rate over 5 years, you will be paying approx. $4,751. in interest and you will own the car outright at the end of your loan.
Advantages of using a home loan:
- No need for additional credit checks and you still make only one repayment each month, if applying for the loan at the same time as a refinance.
- The home loan interest rates are typically far lower, around 2.5%, compared to those you can expect to pay on a personal car loan at 5-15%.
Disadvantages of using a home loan:
- Home loans are a very long-term debt – so you would be paying interest on the car for a far longer period than you would with a car loan which will add to the overall cost of the vehicle.
- Cars depreciate more rapidly so it makes good sense to keep interest costs to a minimum by paying the vehicle off as soon as possible.
Advantages of using a car loan:
- Car loans are usually short-term, 3-5 years so even though the loan rate is higher than for your home loan, the total interest cost will be lower.
- You could own your car outright at the end of 5 years.
- Car loans are more flexible than they use to be – some allow extra payments and redraw may be available. You can also have a balloon which enables your repayments to be lower (although this could cost you more in interest)
Disadvantages of using a car loan:
- Upfront fees and monthly loan services fees may apply
- Car loans will have higher repayments which will have a greater effect on your borrowing capacity should you wish to apply for other loans.
Whichever way you choose to go – drive safe!