Home Equity Loans Vs. Car Loans

Don't assume that home equity loans are always cheaper than a car loan or a credit card.
A car loan at 7.9% is cheaper than a credit line at 12% even after the tax deduction. So compare interest rates and compute the effective rate of your home equity loan, with the rate on a car loan or credit card. Keep in mind your car loan could be paid off in less than 5 years and a home equity loan could take up to 20 years.

There are two types of home equity lending, loans and lines of credit:
Home equity loans are installment loans, like regular home loans and auto loans. You're given a certain amount of money, which you typically receive all at once and pay back according to a set payment schedule, over a set time period. Home-equity loans usually come with fixed rates and fixed payments.

A Home equity line of credit is more like a credit card. Home equity lines of credit allow you to use as much (or as little) of the credit line as you like, up to an approved dollar amount. You can withdraw money when you want to use it. Typically you have between five and 20 years to access this credit line. Once this period has ended, you must stop borrowing and repay the principal and interest. You may have between 10 and 20 years to repay, or you may have a balloon payment. Balloon loan payments require you to pay the principal amount in one lump payment. Often the credit interest rate is adjustable and changes as the economy changes.

Unlike credit cards, however, home-equity lines of credit usually aren't open-ended. For the first 10 years or so, you can draw as much as you want from your credit limit, and you only need to pay the interest charges. In the next stage, however, the "draw" period ends and whatever debt you have left is "amortized," which means you need to start paying principal and interest to retire your debt.