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home equity loan vs car loan

dabuddha

dabuddha

Lifer
I need some advice here.

I'm in the process of looking for a new van and I'm going to have to finance this one. I've never financed my previous vehicles before so I'm not sure which way to go.

I'm looking to spend around 19k or so. I got some offers for car loans and the best rate I got was 2.39% for 60 months.
A co-worker of mine told me that a home equity loan would generally have a higher interest rate but that the interest paid would be tax deductible?
I am looking for a 5 year loan but the plan is to pay it off by the 2nd or 3rd year hopefully (all depends if the wife starts working by then or not).

Any idea/tips/advice would be appreciated! TIA!

EDIT (09/25/2014):
Thanks again all for the help/info/tips. I ended up getting 2.49% for 72 months through the dealer (via capital one) I made sure there was no pre-payment type penalties since I'll be paying it off in 2 years). First time purchasing a car from a dealer so it was an experience but I think I walked away ok. Took about 7 hours because I kept whittling away at the fees they were attempting to charge me.

One was a $895 "get ready" fee. They claim they cleaned/detailed the car, changed the oil, fluids etc. I got them to bring it down to $200
The other was a $499 "processing" fee which I could only get down to $400.

The one thing I'm still on the fence about is the bumper to bumper warranty. They said it was $2900 for 5 years/60k miles (this is a 2010 dodge grand caravan so all that was left was about 1 year on the powertrain warranty). I got him to lower the warranty price down to $2000 but I'm not sure I should keep it or not. I plan on driving this van into the ground (like I've done with my previous vehicles). I made sure there would be no "penalty" or cancellation fee if I decide to drop the warranty and I have 30 days to decide.
 
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The tax deductibility is only worth it if the difference in interest is less then the size of the tax deduction. With a car loan at 2.39%, I think it's unlikely that you would find a home equity loan that makes sense.

Further, what happens if you lose your job in a year and can't afford the Van. It's less risky to have a car loan then have it all on your house.
 
sciencewhiz said:
The tax deductibility is only worth it if the difference in interest is less then the size of the tax deduction. With a car loan at 2.39%, I think it's unlikely that you would find a home equity loan that makes sense.

Further, what happens if you lose your job in a year and can't afford the Van. It's less risky to have a car loan then have it all on your house.
Click to expand...

What are average rates for home equity loans? I can't find a ballpark figure even.
As for the job, I'm not worried about losing my job *knock on wood* But I do want to make sure I make the best choice financially 🙂
 
I've done it a few times and bought cars ought right in the past to take the tax deduction off the house.

Depends these days I'd guess, haven't looked into it lately, the house has been pretty much mostly paid off and have a lot of equity in mine.
 
Are you buying new or used? I'd guess used based on the $19k but 2.39% for 60 months is better than PenFed on used which seems unlikely.

Anyway, if you're buying new you may be able to do slightly better with PenFed. Regardless we're talking about under $40 a month in interest here, the potential savings of being able to deduct it amounts to what, $150 a year?

Not even remotely worth it IMO.

Viper GTS
 
dabuddha said:
I need some advice here.

I'm in the process of looking for a new van and I'm going to have to finance this one. I've never financed my previous vehicles before so I'm not sure which way to go.

I'm looking to spend around 19k or so. I got some offers for car loans and the best rate I got was 2.39% for 60 months.
A co-worker of mine told me that a home equity loan would generally have a higher interest rate but that the interest paid would be tax deductible?
I am looking for a 5 year loan but the plan is to pay it off by the 2nd or 3rd year hopefully (all depends if the wife starts working by then or not).

Any idea/tips/advice would be appreciated! TIA!
Click to expand...

I like simplicity. Your choice of 2.39% for 60 months sounds better to me than home equity. At the same time, PenFed is advertising a new car rate of 1.49% for 36 months which sounds even better...

Your choice. Still, prudence is warranted. Starting to see more articles about poor choices in car loans.

Personally, I wouldn't want to be upside down in a car loan. Nor, would I want to have payments that are longer than the warranty period.

Anyway, best of luck.

Uno
 
Ahh I should have mentioned in the OP. I'm going for a used car. I just can't afford a brand new minivan with the features we want and slightly used looks good to us (looking at something 2010 or newer. Most likely a 2012)
 
sciencewhiz said:
The tax deductibility is only worth it if the difference in interest is less then the size of the tax deduction. With a car loan at 2.39%, I think it's unlikely that you would find a home equity loan that makes sense.

Further, what happens if you lose your job in a year and can't afford the Van. It's less risky to have a car loan then have it all on your house.
Click to expand...

QFT
 
Your itemized deductions must exceed 2% of your AGI for you to deduct them. If not, you must use the standard deduction. And that's a general statement that might not apply in all cases. I found a PDF link at Google that opens in my browser so I can't link it directly but Google '2013 threshold for itemized deductions' and the fourth item down will open the PDF. Every case is different. Check the link.
 
The interest on the car loan will be like $800 total.
Not that big of a deal to try to save tax on...
 
boomerang said:
Your itemized deductions must exceed 2% of your AGI for you to deduct them. If not, you must use the standard deduction. And that's a general statement that might not apply in all cases. I found a PDF link at Google that opens in my browser so I can't link it directly but Google '2013 threshold for itemized deductions' and the fourth item down will open the PDF. Every case is different. Check the link.
Click to expand...

I'm fairly certain the 2% threshold is used to judge the merit of so called "misc" items. People come up with a tons of random things to deduct and the IRS filters this misc category by saying it must exceed 2%. However, I don't believe this applies to the more standard and mainstream deductions, like mortgage interest on a primary residence. I'm definitely not an accountant so take this with a grain of salt.

Obviously if his itemized deductions don't exceed the standard deduction there is no benefit even if it could be counted.
 
Depending on the van you're interested in you may be better off buying new. A Chrysler product you can definitely wheel and deal on while a Toyota/Honda product will retain value fairly well. Might as well buy new and finance a little longer given the low rates. Current loan I have is about 1.8% for 5 years.
 
NutBucket said:
Depending on the van you're interested in you may be better off buying new. A Chrysler product you can definitely wheel and deal on while a Toyota/Honda product will retain value fairly well. Might as well buy new and finance a little longer given the low rates. Current loan I have is about 1.8% for 5 years.
Click to expand...

Yeah I was leaning towards a dodge grand caravan or a town & country. The odysseys and Siennas are just out of my budget with the wife not working right now. I'm looking through autotrader and it looks like a 2014 new town and country goes for about 22k while the used ones I've been looking at are about 18k. I'm hoping to keep my monthly payment at around $300ish
 
Honestly, for $4k I'd rather have new unless you really can't swing the difference. You can probably deal on both prices though but I'd guess the delta would still be similar in the end.
 
to make it even make sense from a money stance the home equity loan/line can't be higher than 2.39 * (1+ your marginal rate). and you might have trouble finding that. even if both were 2.39, the paperwork cost alone is going to eat up any savings (even if there aren't any fees, your time doing the prep is worth something). not to mention, you're putting your house at additional risk to save maybe a couple hundred dollars.
 
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dabuddha said:
Yeah I was leaning towards a dodge grand caravan or a town & country. The odysseys and Siennas are just out of my budget with the wife not working right now. I'm looking through autotrader and it looks like a 2014 new town and country goes for about 22k while the used ones I've been looking at are about 18k. I'm hoping to keep my monthly payment at around $300ish
Click to expand...

Maybe I'm a terrible negotiator (very likely) but the best quote I could get on a T&C base model was $26K OTD. That was with employee discount and was a good $2K less than the next cheapest dealership.

If you can get a new caravan or T&C within 2-3K of used I'd jump on that as the quality has improved a bit over the last couple years.

I would stick with car loan over equity loan. Just in case something bad happens the worst they can do is reposes the van. Plus I don't think you would save much if anything through equity loan+tax refund.
 
Get the car loan. A home equity loan is about double the interest rate of the car loan you mentioned. Even though you get a tax deduction, you would have to have a marginal tax rate of ~50% for the home equity loan to be equal in price to the car loan. Also, home equity loans have high loan origination prices which blows the cost even further into the stratosphere.
 
dabuddha said:
What are average rates for home equity loans? I can't find a ballpark figure even.
As for the job, I'm not worried about losing my job *knock on wood* But I do want to make sure I make the best choice financially 🙂
Click to expand...

Much higher than 2.39%

Also, car loans are short term debt. I'd go with the short term car loan.
 
all right thank you all for the information/advice/tips! I decided I'll stick with the car loan. Now to see what kind of deal I can work out for a new one vs a used one. I do have to agree that a 4k difference isn't that much if I can get the new one that low
 
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