Auto Loan vs. Home Equity Loan Calculator

Use this calculator to figure out whether an auto loan or home equity loan will be cheaper. Home equity loans have some of the lowest rates of any loan by far. But they also have high closing costs. Meanwhile, you may be able to get a low-rate auto loan, through a promotion or by virtue of your excellent credit rating. Then again, home equity loan interest is usually tax deductible.

The calculator looks at all the major costs and savings involved with each loan. It makes it crystal clear whether a given home equity loan will cost you more or less than a given auto loan.

In addition to total cost, the calculator lets you see how high your monthly payments will be with each option. See your total interest over the life of each loan. Also see your total tax savings with a home equity loan. Then check out the summary for a short, sweet explanation of which loan is cheaper.

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Calculator Legend

Purchase Price: the advertised purchase price of the automobile, taking into account any discounts or rebates.
Trade Allowance: the "trade-in" value you are getting from the dealer. If you aren't trading in a car, set the value to "0."
Down Payment: Enter the down payment as a whole dollar amount. When selling a car, dealers traditionally ask for a down payment. However, "no-money-down" offers are common, too. Include the total dollar amount not only of the down payment proper but of all fees you have to pay at the time you buy the car. This includes any "dealer fees." If you do not have to make a down payment, enter "0."
Interest Rate: Enter the auto loan interest rate as a percentage. You can use up to two decimal places.
Term (months): Enter the number of months you will be making loan payments, also called the term. A common loan term is 60 months. However, many financial experts recommend a loan term of around 30 months, to save on interest.
Sales Tax Rate: Enter the state sales tax as a percentage. Sales tax can add a lot to the cost of buying a car. If your state has no sales tax, enter "0."
Fed. Tax Rate: Enter the federal income tax rate you pay. Enter your effective tax rate for the federal personal income tax. You can find your effective tax rate quickly with the effective tax rate calculator. The effective tax rate is necessary because different parts of your income are taxed at different rates according to tax brackets
State Tax Rate: Enter the state income tax rate you pay.
HEL APR: Enter the APR of the home equity loan.
HEL Closing Costs: Enter the total dollar amount of all fees you have to pay at the time you get the loan. Closing costs typically range from a few hundred to under a thousand dollars. If you do not have to pay closing costs, enter "0."
Does your state allow deductions…: Not sure if your state allows deductions for trade-ins? Your state government's or state motor vehicle registry's website will almost certainly have this information.

Auto Loans Explained

Auto loans are available through the dealer, a bank, credit union or other lender. Which is best?

Dealers' financing promotions may make them seem like your best loan option. The promotions include low interest rates, rebates, and delayed payment programs.

But beware. The promotions usually have a catch. That "no payments for a year" program may simply jack up the payments for the remaining years of the loan. The low promotional interest rate may forbid any negotiation on price.

Ultimately, it is unlikely that dealers' loans will be the least expensive. This is especially true for used cars, where the manufacturer rarely provides any support. The dealer is usually just a middleman for banks or finance companies. The dealer's “finder’s fee” will be included in the price of your auto loan. Why not go directly to the lender yourself?

As you are looking around for your auto loan, keep in mind that your credit history is going to have an effect. Any lender will pull a credit report or credit score. If your credit is good, you not only will get the loan, but at a lower rate (APR) than if you have bad credit. Again, don’t be discouraged. You probably will find a lender. You will likely have to pay a bit more with less attractive terms. But if you can meet that financial obligation well, you will have a car and be on your way to improving your credit score.

Home Equity Loans Explained

A home equity loan (HEL), also called a second mortgage, uses your home as collateral. You may apply for a HEL even if your credit is bad.

Home Equity Loans: How Much?

The maximum amount you can borrow with a home equity loan depends on the amount of equity in your home. If you have not built up equity, you cannot take out a loan. You may not have built up much equity even if you have made tens of thousands of dollars in mortgage payments. Mortgage payments have to cover interest as well as principal, and only the principal payments build equity. On the other hand, you may be able to get a home equity loan even if you've owned your home only a few years or less. That would happen if your property values have skyrocketed since buying.

However, you cannot simply borrow the maximum equity in your house. Lenders decide on the amount they will lend you this way:

[Property value] x [LTV ratio] - [outstanding mortgage] = [maximum loan amount]
  1. Assessing your property to determine its value.
  2. Multiplying the house value by a “loan-to-value ratio.” A common LTV ratio is 80%.
  3. Subtracting the outstanding mortgage.
  4. The remainder is the amount that you may borrow.
For example, if your house is assessed at $150,000 and you still owe $50,000, the lender would multiply its value by 80% and subtract the outstanding debt ($120,000-50,000). In that case, you may borrow up to $70,000.

Auto Loans vs. Home Equity Loans: How to Decide

Home equity loans have lower interest rates than auto loans. Simply put, lenders are safer having a house as collateral than a car. Meanwhile, there are also federal tax deductions that may reduce the total cost of a home equity loan.

But whether an auto loan or home equity loan saves more money is not an entirely straightforward question. The money saved with a home equity loan may be wiped out by the closing costs. The calculator gives you a good idea of what you're up against.

A more fundamental issue is that with a home equity loan, you are to some degree putting your house at risk. Of course, an auto loan lender can seize the car as soon as you fail to make payments. But while you can always hitch a ride to work, sleeping under the stars is not an option. The calculator does not address this risk. It's up to you to make absolutely sure you have enough reserve financial resources to cover yourself in an emergency.