Home Equity Line of Credit Vs. Dealer Financing

You have decided to go after that dream car you always wanted or maybe the family van is on its last legs and you need that new family truckster and you are heading out to a dealership to get a new automobile. You know you have a home equity line of credit that can be used, but they also have dealer financing available. Each one has pros and cons that should be weighed.

Home Equity Line of Credit Overview

The equity in your home is the overall value of your home subtracted from the amount that is left from your mortgage. When you have a sizeable amount of equity, you can apply at a bank for a line of credit that gives you access to a set amount of money based on that equity. Your home is tied into the line of credit and from the beginning is used like a credit card. You have access to that money at all times and can take out as much or as little as your need. The balance owed is subject to interest and you must pay it back with a minimum monthly payment.

Dealer Financing Overview

When you walk into the dealership and begin talking with the salesman about financing that perfect car, the salesman has access to financing companies that cater to all aspects of credit scores and payment needs. The majority of them are not local and instead go through the dealer to get the loan information. You make your payments via debit or mail to a company that you only know from the dealership.

Convenience

A home equity line of credit can be very large $20,000 or significantly more and can easily be used to completely pay off the car. You then have the title in your hands and can pay the balance back on the card at your leisure. You can vary the monthly payment amounts and take as much time as you want to pay it back as long as you pay the minimum monthly payment. When you go through a dealer, the financing company keeps the title until the loan is paid off and the payment amount and date are set from the beginning.

Consequences

If you fall on hard times and are unable to pay either the line of credit or the financing company, the end result is repossession of the item connected to the account. In the case of the dealership, if you default on the loan they can repossess that car since they possess the title. If you cannot pay the home equity line of credit, the bank has the right to take your house in foreclosure. You will still have the car, but you would have lost your home.

Similarities

Both car dealer financing and home equity lines of credit will have interest rates attached to the balance. The line of credit is usually lower unless you can get a special promotional rate from the dealership. Both also are due on a monthly billing cycle and can have both a positive and negative effect on your credit score and history depending on your actions while there is a balance.