Q. I need a new car and it will cost around $ 32,000. I have $ 25,000 in cash. Should I use the money and take out a small car loan or use the equity in my home? Or what combination? I have good credit so it shouldn’t be difficult to get a loan.
A. It’s a tough job to find a new car these days because a shortage of semiconductor chips is hurting supply.
But if you find the wheels you want, several factors come into play here.
Keep in mind that the specifics of your financial situation and your goals should impact your decision, but here’s what you should consider.
When you decide to use cash or take a loan for a purchase, you’ll need to factor in the opportunity cost of your decision, said Deva Panambur, paid planner at Sarsi, LLC in western New York and assistant professor of personal finance at Montclair State University.
You said you had $ 25,000 on hand.
Ask yourself: If you weren’t using the money to buy the car, what would you do with it? How the loan cost compare with the return you would get if you had to invest the money?
Also, do your financial and cash flow situation allow you to take on more debt, and is your credit rating good enough to get a relatively inexpensive loan?
âNot all factors are objective, there are subjective issues to consider,â said Panambur. I do not have any.
In general, he said he does not recommend taking a home equity loan unless it’s to improve your home because you never want to be burdened with debt on your home.
There are a few other reasons for this recommendation, he said.
“The interest rate on a home equity loan will likely be higher than the interest rate on a mortgage, because a home equity loan is usually a second loan on your home,” he said. declared. âIt could also be higher than the interest rate on your car loan, especially if you’re buying a new car from a dealership. “
Also consider that the Tax Cuts and Jobs Act of 2017 limited the tax deductibility of interest on home equity loans only if the loan is used to “buy, build or significantly improve the home of the taxpayer who guarantees the loan, âhe said.
So, if you are using the loan proceeds to buy a car, the interest on your loan is not deductible, just as the interest on your car loan is not deductible.
While you haven’t asked this question specifically, you’ll also want to decide whether or not to buy a new car or a used car.
âUsually, if you plan for the long term and aren’t particularly interested in driving a new car, buying a used car is more profitable because cars depreciate quickly over the first few years. years, âsaid Panambur. Therefore, a used car has more “mechanical value” than the price suggests. “
âHowever, due to the unusual dynamics of the auto market, for some brands of cars new cars may be more profitable than used cars,â he said. “These dynamics also impact the buy-versus-lease equation, so you’ll need to do your research before making your decision.”
Email your questions to [email protected].
Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.