Home equity loans shown to relieve car debt

[Sep 12, 2010.]

 

Home equity loans have been used for debt consolidation for many years. It is one of the highest and best uses for that loan product. However, revolving credit card debt and installment loans with short (say five year) terms are different animals. If you have amassed credit card debt, and there is no end in sight to paying the balances in full, then using a home equity line to start fresh can make sense. On the contrary, extending the term of an installment loan you can pay off in just a few years might not be as smart. That is....in a normal economy.

This post-recession economy is very different from the economy everyone enjoyed just a few short years ago. Perhaps you bought a luxury car in 2007 when you could afford a big monthly payment. Now, with reduced income, that same payment has toppled your budget. Home equity loans, either fixed second mortgages or lines of credit, can give you a fresh start and a chance to succeed in this new economy.

By using a home equity loan to refinance a car loan you will almost always increase the amount of interest you will pay for that car. That is why using a home equity line to pay off a car loan is not ideal. Ideally, you want to pay as little interest for your major purchases as possible. However, times are harder today than they may have been when you purchased the car. Paying more in interest could make sense if you are rescuing your budget, which could mean saving your credit score.

The only way to really judge if this option will work for you is to speak to a mortgage loan specialist. He or she will create Truth-in-Lending statements that allow you to compare how much interest you will pay before and after a refinance. Weigh any difference in interest payments against the improvement the loan makes to your cash flow, and decide if the refinance is worthwhile for you.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.