Using a Line of Credit for a Car Down Payment?

You may have the option to use a line of credit for a down payment on a car purchase. A line of credit is any revolving credit loan, such as a credit card or home equity loan. This is a very flexible form of financing, allowing you to decide when to pay down the balance. While there are many advantages to increasing your down payment through a line of credit, there are equally important disadvantages to be aware of.

Advantages to Using a Line of Credit

  • Increase your down payment - If you are able to provide a larger down payment, then your loan amount will be smaller and payment will be more affordable. Instead of having to save for the cash required, using a credit line can give you the immediate liquidity you need to make the large payment.
  • Reduce your auto loan interest rate - When you provide a large down payment, you are a lower credit risk and are eligible for better interest rates.
  • Make higher monthly paymentsWhen you do not spend your savings, you can apply the money to the car you purchase and pay it off faster.
  • Tax advantages - Interest on a home equity loan or mortgage is tax deductible, while interest on car payments is not. Lowering your car payment interest rate and deducting your home equity loan rate will doubly decrease your expense.

Disadvantages to Using a Line of Credit

  • Pay off the down payment - You will be making two payments each month toward your car loan, one for the auto loan and the other for the line of credit. These two payments will decrease the benefits you gain from a cheaper auto loan. This can actually mean your monthly payments are much higher than you expected, making the loan less affordable.
  • Variable rate lines of credit - Most lines of credit have variable interest rates. This means you will not actually know how much the loan is going to cost you until you pay it off in full. You may find the increased expense simply overwhelmed the initial benefits you expected by paying the down payment in this manner.
  • Aggregated risk of the loan - You will have two liens against you in order to obtain just one asset. If you are using a home equity line, then you will actually be risking your home in order to secure an automobile. This aggregated risk is enough for some car buyers to walk away from this option.

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