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New Car: Car Loan, Home Equity or Margin Loan?

Are you in the market for a new car? Have you thought about the best way to finance it? Fortunately, car shoppers like you today have more than a couple of financing options to choose from. You can make some comparisons to determine which suits your budget and saves you money. Below is discussed three possible financing options you can use for your new car.

Car Loans
Car loans are the most common type of auto financing. One reason why they work for a lot of car buyers is the low interest rates. According to Bankrate.com, current average auto loan rates for 48-month new-car loans and 36-month used-car loans are 3.98% and 4.08%, respectively. Banks and credit unions can offer auto loan rates of as low as less than 2%.

Home Equity
It’s not bad to consider using home equity to finance your vehicle. Home values are on the rise now and you can even save on your taxes by using home equity for your car payments. Car loan interest payments per se aren’t tax-deductible. But they can become deductible if paid in the context of home equity or any home-secured loan.

Marginal Loan
You can also use a marginal loan to pay for your new car because the stock market these days is robust and lucrative. Using marginal loan for your car can make it less risky for your broker. Remember though that interest payments in margin loans are not deductible unless the loan is used for taxable investments, which do not include cars.

Tax Returns
To pick out the wisest option from the three, you need to consider tax returns. If you’re like many taxpayers who itemize federal tax return, the deductibility of home equity interest payments does not apply to you. In that case, taking out a standard car loan may be a cheaper option.

On one hand, if you itemize your federal tax return, the after-tax interest rate on the home equity loan can be lower than the approved loan rate. Do not forget to take note of the tax bracket you belong to because it affects your returns.

Risks
Car loan, home equity and marginal loan all carry their own risks. These loans are secured by a collateral—car, house or cash. The lender can take back your car or house if you miss payments. This is called repossession.

In the context of marginal loan, you will have to shell out more money or add assets if the values of the assets you’ve placed as collateral have depreciated below a given limit. Your broker can also sell some of your assets to minimize your debt.

Conclusion
Car loans, home equity and margin loans are all different. And you have to weigh the pros and cons carefully before settling with a financing option. Sometimes, home equity and margin loans seem more expensive than auto loans. That’s perhaps why they aren’t so popular unlike auto loans. Auto loan rates are also lower these days than they were several years back. However, home equity may be a more appropriate auto financing option for people in the top tax brackets, 35% and up. And if you want easy and simple financing for your next car, consider using a margin loan.




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