When it comes to getting finance for your new car, an auto loan is generally the best answer. However there are times when a home equity loan may be the best option for you. So what exactly is a home equity loan and how could it replace an auto loan?

What You Should Know About Home Equity Loans

A home equity loan is basically a loan which you receive when you release the equity in the house which you are living in. To work out the amount of equity which you have you basically need to take the value of your home and then take away the amount which is still owed on your mortgage. If for example your mortgage is $100,000 and the value of the home is $150,000, if you have paid off $80,000 of the mortgage off then you would have $130,000 equity. However, most people have not paid off that amount of money on their mortgage so the amount of equity will probably be a lot less than that.

The equity which you do release can either be paid to you in a lump sum or in instalments for the rest of your life or until it runs out. Many people choose to have the payments made to them in one lump sum so that they can spend it on whatever they want. However, once you have released the equity in your home, you are basically giving your home up to the company giving you the loan.

So what does this have to do with auto loans? Well quite simply you can use a home equity instead of an auto loan to pay for a new car. But what are the advantages and disadvantages of doing this?

Comparing Auto Loans and Home Equity Loans

The difference between an home equity loan and an auto loan is that with an auto loan you would not necessarily lose your home at the end of it. As long as you keep up repayments and you have not secured the loan on your home, an auto loan simply gets you the car, you pay the money back and that is that. With a home equity loan on the other hand you can get a lot more money but you will lose your home when you die. This means that your children will not be able to have the property if you have any.

So overall a home equity loan can be used to purchase a new or used car, but generally an auto loan is usually the better option.