My brother's friend just bought a car. His father, a prominent physicist, took out $19,000 from home equity line of credit (HELOC) to pay for the car. No, his father is not buying him the car. As a college graduation gift, he waived $4,000 from the $19,000 and asked his son to pay back $15,000 plus the interest.
If you were in that situation, what would you do? Would you also use HELOC to pay for the car? Let me give you a few minutes, so you can decide what to do. Do not read any further until you decide. (Tip: this college graduate has no credit history.)
Here is what his father did not see: I know many people use HELOC or home equity loans for major purchases since the Internal Revenue Service usually allows taxpayers to deduct interest on up to $100,000 of HELOC balance. Not only that, equity interest rates are lower than most loans. So, if the car was for himself, the father made a great decision for buying the car with HELOC. But, it was not for him; it was for his son.
If I were his father, this is what I would have done: I would purchase the car using HELOC AND an auto loan that has my son as the primary borrower and myself as a co-signor, and possibly paying $15,000 with HELOC and borrow $4,000 in auto loan. Now, you are probably thinking, "why would I take out an auto loan when the rates are much higher?" The son has no credit and not having credit will cost him much more than thousands of dollars. Yes, the son can build his credit by getting a credit card, but credit bureaus prefer auto loans over credit cards when calculating credit scores. Not only that, auto loans have positive impacts on credit even after paying them off.
The reason the father paid for the car using HELOC was to save money. So, if you want to maximize the savings in this case, take out a small auto loan and pay the rest with HELOC. Having a small auto loan compared to a bigger one does not make significant difference in credit scores.
Sometimes, you may have to forgo visible gains for big hidden gains.
Disclaimer: The information on this blog is general information only and may not apply to an individual's circumstances. Please consult a professional regarding your particular circumstances.
Subscribe to:
Post Comments (Atom)
Posts
He should have taken out an auto loan, then paid off the auto loan with his father heloc under his name. Now his credit balance will go up because he paid off the auto loan (i recommend keeping the auto loan for 3-4 months and paying a little interest before it is fully paid of). Now he has a (lets say in the scenario above) a 15k dollar balance on a heloc that's ammortized over 30 years. He can keep the car for how ever long he wants and pay for it monthly (which will be extremely cheap because of its 30year amortization). He should then sell the car and then fully pay back the rest of the 15k.
ReplyDeleteThere is cheap money, and expensive money, this is cheap money so take advantage of it.
-Shawn