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Why you shouldn't use home equity to buy your new car

Posted on Thursday 3rd September 2015

Putting your new car on your home loan may see like a strategic way to get a good interest rate and save money, however there are a few considerations you should look at before making your decision.

Many people choose to use the equity in their home loan or refinance their current home loan to include the cost of purchasing a new car, however while this may lower your minimum repayments on both, if you are simply making the minimum repayments (or close to) on your home loan, it will end up costing you more in the long run.

Hear what the experts say about using your home loan for borrowing money to purchase a car

The lowest interest rate for borrowing money to buy a car will usually be through your home loan but financial planner from Roskow Independent Advisory, Matthew Ross, says only the most disciplined borrowers should consider this approach. Unless they have a plan to pay lots of extra repayments, you could be doubling the cost of your car.

While home loan interest rates tend to be lower than car finance interest rates, because the size of the total debt is higher on the home loan and the term is longer, this actually equates to a much higher total amount of interest payable. When you take into account the effect of compound interest over the period of the home loan and you consider that you are paying the car off over the life of the home loan (up to 30 years) as opposed to the common car loan term of 5 years, this increases the amount of interest payable on your home loan even though the interest rate may be lower.

Home loan vs car loan, the difference explained

As an example using Commonwealth Bank’s loan calculator tools for comparison, if you have the medium mortgage of $459,000 as described by HIA-CBA’s figures over a 30 year term using their current advertised interest rate of 4.75% per annum, if making the minimum repayments over the next 30 years, you will pay a total of $403,200 in interest.

Now let’s add our new car loan amount of $30,000 to our mortgage above and the total amount of interest over the course of our mortgage now totals $429,360. This is a difference of $26,160 just in interest. This doesn’t even take into consideration the actual repayment of the $30,000 vehicle.

Finally we’ll look at a separate car loan and how much interest is payable on the same vehicle amount above. Because you are a home buyer, you have clean credit history and are buying a relatively new vehicle, you could qualify for an interest rate starting from as low as 4.68%. Assuming you take out a secured car loan from Credit One and for comparison sake, choose not to make any additional repayments above the minimum repayments, you will pay a total of $3,660 interest over a 5 year loan. Ultimately, you will have saved about $22,500 interest on your new car.

How to get the best possible finance rate for a new car

  • Choosing a secured car loan over a personal loan will ensure you get the lowest possible interest rate for your vehicle.
  • Making additional repayments will pay the loan of sooner and reduce the total amount of interest payable over the life of the loan. Quick tip – adopting this idea will make more of a significant difference to the amount of money you save in interest on your loan than a difference in the actual interest ‘rate’ of your loan.
  • Compare lenders to find the lowest rate finance for your current circumstances. Quick tip – while shopping around for a great rate is important, you need to be very careful making multiple applications for finance because each lender may put an enquiry on your Equifax Credit Report, which will ultimately hinder your efforts to secure a good interest rate. The solution, Credit One has access to a panel of over 30 leading lenders who we compare on your behalf to secure the best possible finance approval for your circumstances.

Why choose Credit One for your new car finance?

Credit One specialise in car finance, business finance, truck finance, equipment finance, caravan finance and marine finance solutions for both consumers and businesses throughout Australia. We have provided smarter finance solutions for over 100,000 individuals and businesses since our establishment in 1999 and have been named Swann Insurance “Broker of the Year 2015”.

Our customer service line is open 7 days a week for your convenience, so call us today on 1300 CREDIT (1300 273 348) or apply online in just 60 seconds to find out why more Australians are choosing Credit One for their finance solutions.

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