Should you sign a car loan to buy a car?

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Dear Driving for Dollars,
Should I buy a car using the money from my home equity line of credit, get a loan or use savings?
— Suzanne

Dear Suzanne,
It depends on what interest rate you’ll be paying on the car loan and the home equity line of credit, or HELOC, as well as the interest rate you are earning on your savings. Compare the rates to see what makes the most financial sense. Remember that the interest on the HELOC is often tax-deductible. Bankrate’s car loan-home equity calculator can help you determine whether the auto loan or HELOC is the better deal.

Also think about your future financial situation and whether you might be strapped for cash. Depending on your situation, you may need that cash savings, while a high debt in your HELOC could lead to a default, causing you to lose your home. By getting a separate car loan, you are more insulated from your car purchase affecting other areas of your life, should you run into financial problems.

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If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.

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