Photo: Robert Trachtenberg
Q: With two toddlers, our family needs a larger car. Is it better to finance at the low rates dealers are offering or use our home equity line of credit to buy a car? The line of credit has a higher rate, but the interest could be deducted on our tax return.
A: You should never use a home equity line of credit (HELOC) for a car loan. When you borrow from your house, it becomes the collateral for the loan. If for some reason you can't make the payments on your HELOC, you run the risk of losing your home, and it never makes sense to gamble with the roof over your head. Let's say you take out a conventional auto loan and can't keep up with the payments. Worst-case scenario, your car will be repossessed. Call me crazy, but I'd prefer losing a car to losing a home.
Now let's talk strategy. First, be aware that the low rates you see advertised are typically only for borrowers with pristine credit scores (above 720 or so). So make sure your score will qualify you for a great rate. Next, get a maximum loan term of 36 months—no longer. A car is a depreciating asset, so you should put as little money as possible into the purchase. The longer the loan, the more you pay in interest. Lastly, consider a gently used car. Since the most significant drop in a car's value occurs in the first two or three years, buying one that's just a few years old means you avoid paying for those early years of big depreciation.
Ask Suze your questions about debt & saving money
From the November 2010 issue of O, The Oprah Magazine