Buying a Car: Auto vs. Home-Equity Loans

Let's say you live in South Carolina, and you are looking to buy a $20,000 car with no down payment and a 60-month loan. Home equity loan and auto loan interest rates in South Carolina recently averaged 7.232% and 7.335%, respectively. (You can check out up-to-date loan rates in your area at BankingMyWay.com.) And while closing costs vary greatly from lender to lender, you should expect to spend one percent of your loan or less.

With that scenario in mind, you stand to save $1,034 over five years by going with the home equity loan, assuming you're in the 25% federal and 4% state tax brackets. The bulk of those savings stem from the tax benefits of the home equity loan -- benefits that you may not realize if you don't itemize your deductions. In fact, your monthly payments on the home equity loan are actually $3 more than they'd be with the auto loan. But the $1,210 in potential home equity loan tax savings is enough to cover this difference and still net a significant savings.

But a home equity loan won't always be the right choice. Borrowing against too much of the equity in your home could mean you'd have to pay for private mortgage insurance (PMI). PMI payments would quickly eat away at any potential savings from a home equity loan. And remember that you create additional risk to your home if you choose the home equity loan. Putting your home in jeopardy for just a few hundred dollars in savings may not make financial sense.