Leveraging the Home for a Car
Back in the mid-90's, I remember having a conversation with a friend about how I would pay for a Subaru Outback I wanted to buy. I told my friend I was planning to take out a home equity loan to finance the car. After swigging a sip of his Fat Tire beer, my friend spit out the next sip while yelling, "What! Are you nuts?"
His reasoning, and one I eventually agreed with, was that you shouldn't borrow $20 or $25,000 against your home to buy a car. After all, you never know when you'll have a true emergency that requires that cash, and if you sell the car relatively quickly, and its residual value is not terribly high, your investment has tanked.
I bring this up because there's a growing percentage of car buyers who ARE using home equity loans to buy a new car or truck. In fact, CNW Marketing says last year almost 800,000 vehicle purchases were financed with home equity loans (up from 625,000 back in '95). That means almost 5% of all the car sales this year were home equity loan financed. That's an all-time high.
Is that bad?
Depends on how you look at it. The real estate boom in the last 15 years has more Americans sitting on record amounts of home equity. Why shouldn't those people put that money to use? After all, the interest, unlike auto loans, is tax deductible.
But if the people borrowing against their home don't have much equity and not the strongest income, home equity financed loans can be risky.
For their part, the automakers don't care. While they'd love to finance a sale through one of their finance arms, either way, a sale is a sale.
As for me, my Subaru and my friend? I bought the Outback with an auto loan and it was a great car. And to this day, my friend still scoffs at my plan to borrow against my home to buy a car.
Questions? Comments? BehindTheWheel@cnbc.com