Overhaulin'

Better to finance a car with a higher rate HELOC (tax deductible interest) or a lower interest rate car loan?

Public Comments

1. I'd stick with the auto loan at the lower rate. The auto loan is a fixed rate and the HELOC is most likely tied to prime rate and we're in a rising interest rate environment. The fixed rate and fixed term keeps you making payments and reducing the balance that should be somewhat in line with the depreciation on the car. If you use the HELOC you have to be disciplined enough to make a large enough payment to amortize the amount over a reasonable period of time, otherwise you end up trading the car in and carrying a new note and leaving the prior balance on the HELOC putting yourself in more debt. You can crunch the numbers and see what the tax savings would be at the higher rate, but rememeber you have to itemize your deductions in order to deduct the interest. If you're in a 28% bracket, each dollar of itemized deductions reduces your tax by $0.28. good luck
2. The car loan. HELOC's (home equity lines of credit) are 100% adjustable, so as prime continues to go up, so will your rate. Car loans are low-interest and short-term...better way to go.
3. Lower rate auto loan. The HELOC is adjustible & is technically a lein on your home. If you you dont pay the auto loan, they take the car. If you dont pay the HELOC, the take your home. The auto loan is an additional trade line to strengthen your credit. A HELOC is interest only. You can pay more but we are all born procrastinators. How long will you take ot pay that off?