When choosing to purchase a vehicle there are 4 financing options: good old fashioned cash; financing, where the vehicle is purchased with a loan registered against the vehicle until it is paid off over a period of time; a lease, where the owner pays for a portion of the vehicle over time with some options at the end of the term to return or purchase the vehicle outright; and finally financing from secondary sources. By this I mean financing via a mortgage, or line of credit.

Nowadays it isn’t uncommon for customers to purchase vehicles on lines of credit or through mortgage financing. While this might seem like a reasonable way to access the money needed to buy a vehicle there can be some hidden disadvantages.

1. The Bank Sells Debt – Financing a vehicle through a line of credit or mortgage likely creates an option to pay interest only. To understand the danger of this you need only look at the bottom of your credit card statement. You can see there that paying only the interest usually results in unbelievable timelines to actually pay off any significant amount of debt. I’ve included my personal credit card showing the amount of time it would take to pay it back by only making the minimum payment amount. Now if I would live for 94 years that be fantastic but you can see the problem this would create. Check your own statement as this disclosure is mandatory on all credit card statements.

2. Banks Sell Debt: Part II – if you’re considering using a mortgage-backed line of credit or simply taking a loan against your mortgage to buy a car you may want to be aware of a couple items. Paying off a vehicle over the term of your mortgage will result in a significant increase in interest. So much so that you may be paying for the vehicle two to three times over that 20 year. The potential difference for a 5 year auto loan and a 20 year mortgage for a $30,000 car could be $10,000.

Why do car loans have advantages?  First, a vehicle loan is set up with a predetermined term and interest rate. Not only are your payments guaranteed for the period of the loan so, are the interest rates and the length of the loan. This provides great certainty as to what you actually paying for the vehicle right up front. Second, as a car dealer and as an automotive industry including the banks, there is an incentive to give customers with the ability to pay off their vehicles thereby increasing the likelihood that they will buy another vehicle in the future.

Finally, interest rates are rising and there are some indications that there could be some additional increases coming before the end of the year in 2018. Increasing rates will affect mortgage renews but, current car loans will not be affected. Another small plus.
If you have questions about financing a vehicle or about your credit please contact us or stop in we can help you understand the options available to you.