Should I use a home equity loan to buy a car?

[vi edit]

And what makes you think you're going to get a better deal for financing at a dealer? Did a blizzard blow through hell that I didn't hear about?

Depends on the person's credit. If you have a below pristine credit rating (below 700) you are going to get blown off by many banks and other lending institutions that you speak with. A dealer can find a better deal for you than you would otherwise find on your own. Not always is the case, but sometimes can be.

 

[KarenMarie]

so, basically.. to sum it up...

you will have four kids, two dogs and a vehicle that you are paying way too much for and it, at this point, negative equity. And now you want to go further into debt to buy something else (very high dollar) that you cannot afford to buy outrightso you want to put your house up for it. Cause you want it and dont want to wait. That about right?

I did not mean that to be sarcastic, just want to make sure those are the facts. If so, that seems a bit frivilious and irresponsible. I would suggest that you pay off your lowest cost stuff first then use what you are no longer paying on them to pay off your big stuff. I would never recommend getting further into debt unless absolutely necessary.

the vehicle you are driving now is negative equity. It needs to be paid off ASAP or traded in towards something else. But it seems like what you are looking at is making the same payments for a newer vehicle and being over $20,000 further in debt. That is not fiscally responsbile. With four kids... YIKES! you know how they are always costing for stuff that you did not have in the budget.

A surburban is not a necessity. It want, not a need. A want you really cannot afford at this point.

Meet your needs, not your greeds!

🙂

 

[labgeek]

Originally posted by: vi_edit

And what makes you think you're going to get a better deal for financing at a dealer? Did a blizzard blow through hell that I didn't hear about?

Depends on the person's credit. If you have a below pristine credit rating (below 700) you are going to get blown off by many banks and other lending institutions that you speak with. A dealer can find a better deal for you than you would otherwise find on your own. Not always is the case, but sometimes can be.

This guy is currently paying 19% interest. There's no way his FICO is > 700...

Edit (to complete my thought) -
With the marginal score, the negative equity on the trade-in, and the strong desire to buy, the dealer knows he has him by short ones. A dealer often has a financial interest in selling less than the best financing for him.

 

[StageLeft]

Originally posted by: labgeek

Originally posted by: vi_edit

And what makes you think you're going to get a better deal for financing at a dealer? Did a blizzard blow through hell that I didn't hear about?

Depends on the person's credit. If you have a below pristine credit rating (below 700) you are going to get blown off by many banks and other lending institutions that you speak with. A dealer can find a better deal for you than you would otherwise find on your own. Not always is the case, but sometimes can be.

This guy is currently paying 19% interest. There's no way his FICO is > 700...

I think he was speaking in a general case 😀

 

[djNickb]

Originally posted by: Skoorb
You have 4 kids, not very good credit, and presumably little to no liquid assets you can use to help purchase a new vehicle. I would urge you strongly to stick with the minivan. Sure, it's tight, but you can manage. Or, at worse get a minivan with a third back row (if yours doesn't have one). Forget the new dog right now. A suburban is a wasteful expenditure for somebody who's hurting for money. Compared to a minivan it's worse on gas and costs more. There's just no need for it. Just because you can be lent the money to buy a new vehicle doesn't mean that you can responsibly afford one.

 

[desy]

Still , blew off my suggestion of a full sized van
Hmmmm
Get a Chev Express 1500, seats 8, V-6 20 mpg on the highway. . . .
Just not sxy enough ?
Too bad cause that would be your best bet considering your finacial situation. . .

 

[Sketcher]

1. Change the way you're thinking of debt. Remember when you thought buying into debt at a high rate was a "necessary evil" in order to get into your nice minivan? Well, now it's not all that great is it? Doing what it takes to get into a Suburban isn't going to seem all that necessary after you 'get used' to the additional fuel costs, 4th child costs and extra dog costs. It'd be nice to have the extra dog but does that nicety balance another mouth and extra cargo room to pay for?

2. Putting the auto on your home mortgage is fine if you're not at all concerned about losing your job and don't care about increasing long term debt on yet another quickly depreciating item. You do get the tax break and a better rate, but your liability doesn't change. You're still incurring debt at a higher rate than you're able to save. If you're trying to make ends meet now and shoe horning in a Suburban I doubt you're putting any money into savings - so what you have in a few years is a Suburban that used to be the cat's meow but the second dog and vehicle depreciation just make it a black hole that money's sunk into. You'll be looking for another vehicle in a few years and have nothing to show for your money in-spite of the home loan and reduced rate on a larger loan.

3. It's not sexy by immediate means but paying off your current loan and having cash to work with will get you further in the long run. So what if you can't get your rate down... Make extra payments. Use a loan calculator to figure out how much an extra $50-100 a month will do you. If your budget's too thin to make extra payments - then for God's sake don't do anything that'll ultimately raise your debt index! One way or another there's a way you can get your rate down or find a financial institution which can work something out. If anyone is willing to extend your debt, someone somewhere will be willing to help you better manage your current debt.

More often than not, most people who work their way out of debt and start saving so as to pay for items in cash; actually do not make those unecessary purchases in the long run. When you learn to live within your means, and appreciate saving money - the things you once thought were "necessary evils" or life changing amnenities really aren't all that necessary or life changing. In fact, it prohibits your ability to change your life. Conversely, if the need is still there when you've been able to manage your income to afford without incurring significant debt then you're in a better place to handle it. You have your, your wife's and kids' health and future to consider as well. One bout of health issues with any of you and whatever savings you have is going to exit the bank post haste. You'll find that you could have gotten by just fine with your mini-van (no doubt you can use a better rate though).

I was looking to "upgrade" to a larger vehicle myself and considered a Suburban or similar (three kids, dog, stroller etc.) until we got ourselves out of credit card debt this last year. Managing more "lower rate" loans isn't the answer when managing debt. If you're not significantly reducing debt in the short term you're not helping yourself. Money is still going to pay debt rather than pay yourself and you'll be in the same place, with little or no money in a few years. Now that we're putting money into savings rather than on the latest "low rate" card or home equity loan we actually value our purchases differently. It took a couple years of cutting out the "necessary evils" and broadband and eating out etc. etc... but now we're actually saving money, planning for vacations and can handle a few months of unemployment if the job doesn't hold out. You really do think about things differently once you get out of the unecessary evil that the credit lenders say we can handle.

Congrats on #4.
I hope you can get your rate down on the mini-van without making a decision which incurs more debt.
Good luck to you!

 

[Blieb]

If your goal is debt ... do it!!!

If your goal is retirement, future wealth, etc ... DON'T EVEN THINK ABOUT IT.

Home equity ... 2nd mortgages, etc ... should only be considered in certain situations. This is definitely not one of those times.

You'll just be digging yourself a deeper hole. Surely you haven't even considered the fact that your insurance will go up, or that you'll be paying DOUBLE for gas ... let's not forget, suburbans realistically get about 15mpg on a good day.

"and a second dog we would like to get" ... I can sympathize with wanting ... but if you don't have the $ or the savings plan to get there, don't even think about it! You'll just keep digging yourself deeper in the sh!tter.

Why not plan on rethinking your expenses after you get your tax return?

 

[RossMAN]

Originally posted by: vi_edit

And what makes you think you're going to get a better deal for financing at a dealer? Did a blizzard blow through hell that I didn't hear about?

Depends on the person's credit. If you have a below pristine credit rating (below 700) you are going to get blown off by many banks and other lending institutions that you speak with. A dealer can find a better deal for you than you would otherwise find on your own. Not always is the case, but sometimes can be.

I disagree from personal experience. First of all credit score is NOT everything. A good lender (a local Credit Union which doesn't use computer automated programs to base credit decisions) will look at ALL the factors and make a final decision.

My credit score is 634 or so, my wife is around 680 I think. Honda approved me at 10.5% (maybe it was 8.5%). I was just happy to be approved for a new $17k car so I signed the contract, made on time payments for 12 months then re-financed with a local CU. I have become very accustomed to being rejected (credit wise) and was ready for the CU to decline our application based on my high balance to limit ratio's and low credit score. Much to our surprise they APPROVED us for a re-fi because they look at the big picture. I asked the CU loan officer (only 1 of 2) why he approved us and he said:

1) Ross you work for a bank and used to work in loan origination so you should already know this. LOL

2) Although your credit score is low, your wife's is slightly higher and she's not even a U.S. citizen.

3) Your debt to income ratio almost exceeds our limits, barely.

4) You've been at the same residence for several years, same job for 9 years, NO LATE PAYMENTS, usually pay off your balances.

5) Since you got your first CitiBank cc with a $300 limit almost 10 years ago you have consistently shown that you are responsible with your credit.

6) Then he joked that my employer (a bank) would probably decline me for a re-fi and I totally agreed with him 🙂

Thanks to my CU taking a personal human approach to my re-fi. I was approved, signed loan documents and paid off my Honda Finance loan all within 24 hours. I also lowered our rate from 10.5% to 4.75% 🙂

So credit score is NOT everything.

 

[vi edit]

I disagree from personal experience. First of all credit score is NOT everything. A good lender (a local Credit Union which doesn't use computer automated programs to base credit decisions) will look at ALL the factors and make a final decision.

Like I said, it's not an absolute. Not everyone has the luxury of being near (or a member of) a good credit union. I've known several people(including myself on my first car loan) that have gone through dealer financing and got better rates through the dealer than what any bank was willing to offer.

 

[CPA]

I'm not sure if anyone mentioned this or if you spoke to a dealer yet, but you may not be able to put 3K in negative equity into a used car. Some dealers may balk at that. Means you will have to put some money down.

 

[RossMAN]

Originally posted by: vi_edit

I disagree from personal experience. First of all credit score is NOT everything. A good lender (a local Credit Union which doesn't use computer automated programs to base credit decisions) will look at ALL the factors and make a final decision.

Like I said, it's not an absolute. Not everyone has the luxury of being near (or a member of) a good credit union. I've known several people(including myself on my first car loan) that have gone through dealer financing and got better rates through the dealer than what any bank was willing to offer.

True.

In some rural (cough cough Iowa cough cough 😉 ) parts of the country people don't have access to 50 CU's in one city.

I am quite jealous of car dealerships offering 0% for 3 years. Although my payments would be higher, I'd gladly take that. FREE MONEY for 3 years.

 

[DT4K]

Originally posted by: Skoorb
Actually, I think your best bet is to get that home equity loan for as little as you need to pay off the van and pay the van off with it (just to lower the interest).

So basically you want something you can't really afford. The American way.

It seems that way. I'm not going to lecture a parent of 4, but your kids are going to eventually need braces, college education, swimming lessons, ballet lessons, etc. How are you going to afford all of these if you are living paycheck to paycheck, due in part to your inability to restrict your spending?

We already have things like swimming lessons, soccer leagues, etc., in our budget. My kids come first and I make sure that I can afford to keep them insured, fed, housed, clothed, and entertained before I spend money on anything for myself.
But I do understand the concern and I agree with you. I guess that is why I posted here rather than just going out and doing something stupid to get further in debt.
I can usually count on ATOT members to give me a smack and tell me not to be an idiot.

There are a couple of things that keep me thinking it might not be such a bad idea.

First, I am not talking about raising my monthly expenditures by much if any.
I'm currently paying 300 a month for the van and if I did a home equity loan, I would end up paying the same or less. Although it would mean increasing overall debt and paying for a longer time period.

Second, one of the reasons things are tight now is that I'm making payments on old debts from when I was in school. Some of these will be completely paid off in a couple of months.

Third, I know that in 3 or 4 years, my wife will begin working and we will have quite a bit more money coming in and will be able to put a lot more money into retirement savings and paying off debts.

I think we would be fine getting a new vehicle, assuming I don't lose my job or something.
Of course that is a dangerous assumption to make. I like knowing right now that if I lost my job and had to sell my house, I would end up with at least 15-20k in cash after closing. That is a safety net that I am not eager to throw away.

You guys are right and it probably would be a stupid thing to do right now.

So if I keep the van for now and decide not to buy another vehicle, do you guys think it would be stupid to get a home equity loan for the amount that I still owe on the van and just pay that off? That way, I wouldn't be paying that high interest. So I could either lower my payments, or I could keep making the same payments but have that loan paid off much sooner than I would if I keep the 19% loan.

Or should I try to get a home equity line of credit at a lower, but variable, interest rate so I can pay it off even faster?

If I just borrowed enough to pay off the van loan ($9000), then I wouldn't be using up all my home equity and I would still be able to afford the real estate commissions if I lost my job and had to sell the house.

Would that be smart or stupid?

 

[vi edit]

In some rural (cough cough Iowa cough cough ) parts of the country people don't have access to 50 CU's in one city.

Yeh, we have dealers around here that are offering anywhere from 0% (rare but it happens) to 3% financing for 60 months on USED cars that are a year or two old. A bank or even our beloved credit unions could never touch that. Granted...if you have crap credit you wouldn't get the low rates anyway, but it still gives you a better base to work off of.

 

[royaldank]

Also an option: Get a luggage rack for the top of the minivan. You can actually store quite a bit up there. Certainly camping gear and so forth. Problem solved while you pay more than minimum each month to get the loan down. Live within your means. Take the thread as advice and make a lifestyle change. It wont be as fun short term, but imagine 10 years later. You will have a savings account with money, no fear of loosing your house if laid off, a moderatly good vehicle with little owed and a low interest rate, and something you can trade in because you really need something, like a smaller car to help pay for college since the family is shrinking.

 

[royaldank]

You seem to be thinking more wisely now. However, I think waiting a year and storing a few months of the soon to be paid off old debt would put you in a better position.

 

[StageLeft]

First, I am not talking about raising my monthly expenditures by much if any.
I'm currently paying 300 a month for the van and if I did a home equity loan, I would end up paying the same or less. Although it would mean increasing overall debt and paying for a longer time period.

I know a girl who says the same thing! They're paying $324/month on a jeep. It's worth about $7.5k and they owe $9k on it. She hates paying that, so she wants to buy a $15k car, and will end up paying $300/month. To her their monthly payments will go down. Yeah, true, but their debt goes up! That jeep would be paid off in 2-3 years, vs. 5 years of paying for the new vehicle.

Second, one of the reasons things are tight now is that I'm making payments on old debts from when I was in school. Some of these will be completely paid off in a couple of months.

Wait, and then reevaluate then? 🙂

Third, I know that in 3 or 4 years, my wife will begin working and we will have quite a bit more money coming in and will be able to put a lot more money into retirement savings and paying off debts.

Same answer!

do you guys think it would be stupid to get a home equity loan for the amount that I still owe on the van and just pay that off?

I think that's a good idea, although closing costs will eat up some of the savings. Also, be sure it doesn't make you think that since the van is "paid off" it will, a year from now, make you want to use it as a trade in on a new car!

I think you should ask yourself: "Based on my current income and debts, am I going to be where I want to be in 20 years?". I think you'd say no, from a retirement perspective, safety net perspective, and kids' education perspective. You say your wife in 3-4 years will be working, but that's a long time from now. Maybe she will and maybe she won't. You should probably budget based on the now, not an unknown future.

 

[DT4K]

Originally posted by: labgeek

Originally posted by: Shanti

I know we can wait if we have to, I just don't want to.

Sounds like you've already made up your mind... Everyone here is telling you what you already knew to be true. That is, you can't really afford to upgrade your vehicle right now. So are you just really looking for someone to say yes go ahead and take out that home equity loan. You need the fancy new behemoth. If that's the case, then yeah go ahead. After all, I don't have to pay the note.

And what makes you think you're going to get a better deal for financing at a dealer? Did a blizzard blow through hell that I didn't hear about?

Dealer's have access to a ton of lenders and sometimes can get better rates for people with poor credit. My FICO was 475 when I financed my van at 19% two years ago. My FICO is now around 615 and Capital One will finance me at 11.9%. A couple of months ago, a dealer offered me 12%, which I turned down because I would have gotten screwed on the trade in and ended up with much more negative equity. We then had another dealer tell us they could get us 10%. Not sure if they were telling the truth or not though.

If I had made up my mind, I wouldn't be posting.
I think I was looking for a reality check. You guys are like an AA sponsor or something. Not speaking from personal experience by the way.
Thanks for telling me not to do it.

 

[labgeek]

Have you even checked with a broker like eloan?

Used Vehicle
Based on a loan amount of $17,000 for a used vehicle. 36 month 60 month
Credit APR Payments APR Payments
Excellent** 4.55% $506 4.99% $321
Good 5.79% $516 5.89% $328
Average 6.19% $519 6.19% $330
Fair 8.19% $534 8.19% $346
Poor APR varies from 15.95% to 20.95%

From thier description you should fit into the "fair" category.

Fair Credit
Credit scores between 580-619 (Rate search will use 600, rates vary within this category)
At least 3 trade credit lines (credit cards, auto loans, mortgages) have each been open for at least 24 months
Most accounts have been paid as agreed, with only occasional late payments
No public record of bankruptcy, foreclosure, serious past due accounts, or collections within the last few years
May have significant credit balance relative to maximum available credit limit
Several recent credit inquiries

BTW, what a dealer tells you and what they actually ask you to sign are often 2 very different things.

I know I'm repeating myself but... You do understand that dealers have an incentive not to sell you the best financing right? They make more money on selling you a crappy loan.

 

[Vic]

This issue is a little complex, and require more than just simple mortgage advice (thanks for the vote of confidence, Ross), but I'll do my best.

Never finance a car with your house. That Home Equity Line of Credit (HELOC) will have an adjustable rate (at 8% today, I'm going to assume Prime + 4%) and a 20 year maturity. It may seem like the cheaper way to go, but that interest rate WILL go up in a year, and you could still be paying on that new car 20 years from now if you go that route. And don't forget that home mortgages generally have closing costs. Even this small HELOC could have a couple of hundred dollars in costs for appraisal and title.

What I would advise doing is waiting. Squeeze the kids into the van while you're paying it off. I'm sure it's not the news you wanted to hear, but it is the best advice. You've only been in the house just over a year (and you bought it on a low-down FHA loan IIRC). Now is a little too soon to start borrowing from your equity IMO. If you're worried about being upside-down in your van by $2-3k, then you obviously (if you'll pardon me) don't have much of a savings cushion set aside. Fix that problem first. How may paychecks could you miss right now and not fall into financial disaster? Won't buying this Suburban not only make that problem worse, but put even more risk on the house should that disaster strike?

 

[OutHouse]

dude, if you use the equity in your house to buy a fricken suburban you are a fool. No wonder you are in the positoin you are in right now. Keep the equity in your house and just deal with feeling cramped in the mini-van. Go and buy a 300 buck yakima car carrier and put it on the roof or get a hitch installed and tow a trailer for those long trips.

Save the equity for something important like unexpected medical bills or if you loose your job, that extra cash will come in handy.

also you might want to call your doctor and schedule a vasectomy appointment.

 

[OutHouse]

Originally posted by: Vic
This issue is a little complex, and require more than just simple mortgage advice (thanks for the vote of confidence, Ross), but I'll do my best.

Never finance a car with your house. That Home Equity Line of Credit (HELOC) will have an adjustable rate (at 8% today, I'm going to assume Prime + 4%) and a 20 year maturity. It may seem like the cheaper way to go, but that interest rate WILL go up in a year, and you could still be paying on that new car 20 years from now if you go that route. And don't forget that home mortgages generally have closing costs. Even this small HELOC could have a couple of hundred dollars in costs for appraisal and title.

What I would advise doing is waiting. Squeeze the kids into the van while you're paying it off. I'm sure it's not the news you wanted to hear, but it is the best advice. You've only been in the house just over a year (and you bought it on a low-down FHA loan IIRC). Now is a little too soon to start borrowing from your equity IMO. If you're worried about being upside-down in your van by $2-3k, then you obviously (if you'll pardon me) don't have much of a savings cushion set aside. Fix that problem first. How may paychecks could you miss right now and not fall into financial disaster? Won't buying this Suburban not only make that problem worse, but put even more risk on the house should that disaster strike?

Excellent post with sound and factual advice.

 

[DT4K]

Originally posted by: Vic
This issue is a little complex, and require more than just simple mortgage advice (thanks for the vote of confidence, Ross), but I'll do my best.

Never finance a car with your house. That Home Equity Line of Credit (HELOC) will have an adjustable rate (at 8% today, I'm going to assume Prime + 4%) and a 20 year maturity. It may seem like the cheaper way to go, but that interest rate WILL go up in a year, and you could still be paying on that new car 20 years from now if you go that route. And don't forget that home mortgages generally have closing costs. Even this small HELOC could have a couple of hundred dollars in costs for appraisal and title.

What I would advise doing is waiting. Squeeze the kids into the van while you're paying it off. I'm sure it's not the news you wanted to hear, but it is the best advice. You've only been in the house just over a year (and you bought it on a low-down FHA loan IIRC). Now is a little too soon to start borrowing from your equity IMO. If you're worried about being upside-down in your van by $2-3k, then you obviously (if you'll pardon me) don't have much of a savings cushion set aside. Fix that problem first. How may paychecks could you miss right now and not fall into financial disaster? Won't buying this Suburban not only make that problem worse, but put even more risk on the house should that disaster strike?

Thanks.
So if I decided to keep the van and not buy anything else right now, you still wouldn't suggest an equity loan or credit line just for the 9k to pay off the 19% car loan?

 

[DT4K]

Originally posted by: Citrix
dude, if you use the equity in your house to buy a fricken suburban you are a fool. No wonder you are in the positoin you are in right now. Keep the equity in your house and just deal with feeling cramped in the mini-van. Go and buy a 300 buck yakima car carrier and put it on the roof or get a hitch installed and tow a trailer for those long trips.

Save the equity for something important like unexpected medical bills or if you loose your job, that extra cash will come in handy.

also you might want to call your doctor and schedule a vasectomy appointment.

LOL. Yeah, this is the 4th and last. I'll be making that appointment as soon as she is born.

I know it's hard to believe, but I really am doing much better at managing my money than I used to. I've got about 7k in my 401K right now after a year and a half of being a permanent employee here. And I know you guys are right and I need to just stick with the van for now and not go into more debt. It's just hard. I spent 10 years after high school working crappy minimum wage jobs and living in tiny apartments before I finally got my CS degree and got a real job. All of a sudden I was making 4 times as much money as I had ever made before and I thought I was rich. So after all those years of dreaming about being able to buy a house and a nice car, it's frustrating that money is still so tight. I'm still getting used to the fact that it's not as much as it seemed.

 

[labgeek]

Originally posted by: Shanti

I know it's hard to believe, but I really am doing much better at managing my money than I used to.

If your FICO score has come up 140 points in 2 years, you're doing very well. Why f that up? 401K = retirement not rainy day money (though it could be used for that to save the house), but you should have both. Me - I've got a 401K, 403B (hospital was non-profit before the merger), and savings to boot. I used to make the wrong decisions regading credit too. But the key is to figure out that you really already know what the right answer is, and MAKE IT.