Car Buying Advice
Step-by-step: Buying a used car
Not sure where to start? Whether you are looking for a certified pre-owned or a private sale, or are buying from a dealer or neighbor, Consumer Reports can help lead you through the used car buying experience. This guide provides the essential information you need to choose
a used car with a good reliability history, sell your old car, and get the best price. Also, see our new car guide.
- Pricing
- Financing
-
Selling a used car
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.
Last reviewed: April 2009
