Used Vehicle Loans

Used Car Financing

Everyone is familiar with the traditional forms of used car financing. These include bank loans, credit union loans and finance company (such as Ford Motor Credit) loans. All three loan types have a number of things in common: they are for a fixed period of time, they’re all simple-interest loans and, finally, a bank lien is placed on the vehicle being financed.

There are, however, other ways you can obtain used car financing:

The first type of alternative used car financing is through a home equity loan. With the current drop in home values across America, these types of loans are not as prolific as they used to be. But depending on the equity situation you have in your home and the area in which you reside, this type of loan may still be available to you.

In its simplest terms, a home equity loan is a second mortgage. While banks in the past were able to lend up to 80 percent of your home’s value, that figure is certainly on the high side, given the current state of the real estate market. If you fall within your lender’s current parameters, it is possible that this type of loan could garner you an APR that is lower than most conventional auto loans.

On the upside, the big benefit of used car financing based on a home equity loan is that the interest that you pay is tax deductible, provided you itemize your deductions on your income tax return. On the downside, unlike conventional used car financing, your home is the collateral for the loan. If you can’t make the payments, your car won’t be repossessed, but your home could be foreclosed on.

The second type of alternative used car finance is through the use of a home equity line of credit. You apply for this type of loan by requesting a line of credit from a bank based, again, on the equity in your home. Once approved, you write a check that is written against this lone of credit. As with the home equity loan, interest is tax-deductible. It also allows for payment flexibility. Rates, unfortunately, tend to be variable, so what started as a good deal could turn out to cost you more money that you originally anticipated. These loans are also structured for longer periods of time, so that you could end up paying quite a bit more in interest expense than a conventional loan. Finally, just as in the home equity loan, any default could lead to the loss of your home.