Car Buying Advice
Car Buying Guide
Whether you are looking for a fuel-efficient small car, a sporty convertible, or a family minivan Consumer Reports can help lead you through the new car buying experience. This guide provides the essential information you need to choose,
buy, finance, and maintain a new car.
- Car financing
- Car insurance
- After the sale
- Used car guide
Choosing a car:
In this section
Insurance
In this section
- Pros and cons of leasing
- Buying vs. leasing basics
- Keys to the best rate
- Where to shop for a loan
- Financing alternatives
Insurance
Auto-financing alternatives
In addition to conventional auto loans, there are other ways to finance an auto purchase, each with its own advantages and disadvantages. These include home-equity loans, home-equity lines of credit, and credit cards.Home-equity loan
This lets you borrow against the equity in your home and is essentially a second mortgage. Banks will usually lend you up to 80 percent of the equity in the house, and the APR can be lower than a conventional auto loan.
One benefit of a home equity loan is the ability to deduct the interest as an itemized expense on your income tax. That could be enough to make up for fees typically charged to initiate the loan. Just a word of caution, though. Remember that a conventional auto loan uses the vehicle as collateral, and a home equity loan uses your home. If something happens and you can't make the payments, your home could be in jeopardy. That's a big price to pay for an auto loan, so consider this option carefully.
Home-equity line of credit (HELOC)
A home-equity line of credit is an open-ended, revolving line of credit based on the equity in your home. To purchase a vehicle using a HELOC, you write a check that is drafted from this line of credit.
The advantages of this type of loan are tax-deductible interest, payment flexibility, and a comparatively low initial interest rate. The rates are variable, however, so the interest rate could go up before you have paid off the loan, costing you more money overall.
And some HELOCs charge interest only, which means you'll have to make a balloon payment on the principal several years out. Or you can convert to a fully amortized loan over a specified repayment period.
Like a home-equity loan, this line of credit is tied to your home's equity, so you could risk a lien on your home if payments are not met.
Home equity debt is structured to be paid back over longer periods, usually 15 to 20 years than car loans. Unless you are disciplined and pay it back over 3 or 4 years, you could still be paying the loan well after the car is out of service. Some banks might charge you a prepayment penalty.
Following the subprime mortgage fallout in the summer of 2007, banks have tightened the requirements for home-equity loans. And with home values dropping, you may not have enough equity available to tap into.
Credit card
You can also purchase a car using a credit-card draft, which is a cash advance that works like a personal check. You may have received a draft in the mail from your credit-card company with a letter encouraging you to pay off other credit balances or make some other large purchase with them. With low introductory rates, cash-advance fee waivers, and high credit limits (sometimes reaching past $20,000) it may be tempting to use one to buy a car. But we don't advise this. Like a HELOC, this is a revolving line of credit that gives you flexibility in your monthly payment. Still, interest rates can climb promptly and dramatically once the attractive introductory rate has expired, since credit-card debt is secured by neither your vehicle nor your home equity.
