What Is A HELOC?
A HELOC, or a home equity line of credit, has lower rates and flexible terms when compared to other available loans.
The funds can be utilized to restructure the home, pay tuition fees, or even buy a car.
Most homeowners use it as a supplemental resource to manage rising monthly debt payments.
A HELOC is essentially a mortgage loan that functions as a credit card. You get a preapproved amount in your account which can be used as and when required.
You can use a portion or all of the approved funds and will only pay interest on the amount used. This revolving credit line uses your home as collateral.
It is a secured loan; hence you can easily get a decent APR based on your credit history.
Like most financing options, it also includes a credit check, a lot of supporting documents, home appraisal, application fees, processing charges, and more.
Is A HELOC Or Auto Loan More Affordable?
There are a lot of auto loan options to choose from – unsecured, secured, pre-computed interest, simple interest, title, lease buyout, indirect financing, in-house financing, and direct financing.
However, a HELOC is a straightforward secured loan and there aren’t any options.
In general, you can get an auto loan from different lenders, but the number of alternative lenders beyond banks offering a HELOC number just a handful.
Talking about affordability, a new car loan for someone with a FICO score between 650 – 699 starts at 12% APR.
As for HELOC, the rates range between 2.87% to 25% depending on the credit score and other relevant factors.
On the other hand, auto loans have a strict repayment term and you can only benefit if you stick to terms lower than 48 months.
By comparison, HELOC repayment terms are extremely lengthy and the line of credit is revolving, so the sooner you make payments, the more funds you have available for other needs.
A $20,000 auto loan for 3 years at 11.25% interest means a total interest of $3,657.
If you have a home that is worth $100,000, an LTV of 80% or less, and a credit score between 620 to 679, you might be eligible for a variable APR of 7.4% with the option to pay in an extended term.
Let’s say you pay it off in 3 years. At that rate, the total interest you paid is just $2,363.
Which Is Easier To Get: A HELOC Or Auto Loan?
The best way to get quicker approval and better rates on an auto loan is to collect quotes from multiple lenders.
The requirements for an auto loan vary by the lenders and the state you reside in.
You’ll need to provide proof of address, identity, and income.
Besides this information, you’ll also need to provide valid documents of vehicle registration, insurance, banking and credit history records, and more.
There are too many options, thus it might get confusing at times. However, the chances of approval on a car loan are comparatively higher than any other loan.
A HELOC, on the other hand, isn’t for everyone. It features stringent approval criteria like a lower loan-to-value ratio along with a FICO score of 620 and higher.
You must hold 15% to 20% equity of the total value of the home, and the lenders determine this using a standard home appraisal process. Because of these many criteria, getting approved for a line of credit is difficult.
Still, if you receive approval, you’ll probably be entitled to lower interest rates.
What Are The Pros & Cons of Financing Auto Purchases With HELOC?
A HELOC offers greater versatility than most loans.
Some standout benefits are:
- The line of credit offers repayment terms of 10 to 30 years.
- The interest rates start as low as 2.87% and go as high as 25% depending on your credit score and other requirements.
- You’ll get better rates when you walk-in to the dealerships with an approved line of credit.
- You will also get tax discounts on the interest paid. This isn’t available with auto loans.
As with most things, a HELOC also has certain drawbacks:
- You’ll need to bear the processing fees and other charges associated with the line of credit.
- Since the repayment terms are extended, you might end up paying more than the actual value of the car. Besides, you’ll be stuck with the same model for a longer time.
- You might also be charged a closing cost. Furthermore, if you default, there are high penalties. You can even lose your home in case of delinquency.
HELOCs are best for people who need to frequently borrow various amounts of money, while auto loans are better for people who want to borrow a pre-defined sum of money once for a specified fixed period.
It is important that you consider factors like the real estate value, the vehicle’s depreciation rate, APR, and loan types before committing.