Driving A Bargain

Stick with an auto loan or shift to home equity? Tips on how to wheel and deal

Your Money

May 30, 2004|By Jim Mateja

Buying a new vehicle requires so many decisions. Sedan or coupe? Import or domestic? Luxury or economy? Once those questions are answered, the tough one comes: Should you take the cash rebate or the discount financing? If financing, should you go with a vehicle loan or use home equity?

Weighing cash-back incentives vs. a low interest rate

"When offered $1,000 or less in rebates, in most cases the factory-sponsored discount financing rate, whether zero, 1.9 percent or 2.9 percent, almost always is better than the rebate. But when the rebate is $3,000 to $5,000, take another look," advised Lee Weinman, a Chicago Ford dealer. For example:

If financing $20,000 for 48 months at zero percent, the monthly payment would be $416.

If offered a $1,000 rebate, that leaves $19,000 to finance for 48 months at the 6 percent rate that's typical now. The monthly payment would be $449.

If offered a $3,000 rebate, leaving $17,000 to finance at 6 percent, the monthly payment would drop to $403.

Banks and any dealership will provide a detailed rundown of the monthly payment with or without rebate and at different interest rates over a variety of payment periods so the consumer can compare.

But if you opt for a rebate, check with your state to see if its department of revenue considers it taxable.

A home equity loan may be a better option

Once you've decided to finance, another array of options opens up, among them a conventional new-vehicle loan or a home equity loan. Keep in mind that many dealerships consider financing as a profit center, so check bank or credit union rates before you get a loan through the dealer.

Shop lenders to learn if you qualify for a loan, for how much and at what interest rate, so that you know if a loan is available at a lower rate than the dealer will quote you.

And then check out the lender's home-equity loans as an alternative to the conventional vehicle loan.

"A typical new-car loan today runs in the 6 percent range, but a home-equity loan is pegged to the prime lending rate [what the most creditworthy borrowers pay], and it's at 4 percent now," said Greg Wilson, vice president of consumer lending for Harris Savings Bank and Trust.

The home-equity loan has two advantages over a new-car loan: The interest can usually be deducted from your income taxes and the monthly payment is only on the interest, not the principal. Unless you opt to pay down some of the principal on a regular basis, you don't have to pay off the principal until the loan matures.

"On a $20,000 home-equity loan at 4 percent over 60 months, the monthly interest is $66, or $19 a month less than the interest on a $20,000 auto loan at 6 percent over 60 months. On a 60-month loan, the savings would be $1,140, plus you have the tax deduction on the interest on the home-equity loan," Wilson said.

Most consumers don't think about a home-equity loan because automotive loans traditionally have been the way to buy a new vehicle, Wilson said.

Others just like having a fixed payment each month with a new-vehicle loan. Rates on home-equity loans can fluctuate with the prime rate and could become higher or lower than those on auto loans. And to qualify for a home-equity loan, you need to have enough equity in your home.

Check with your banker to learn all terms and conditions and compare those with your current new-car loan rates before shopping.

Jim Mateja is an auto writer for the Chicago Tribune, a Tribune Publishing newspaper.

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