29 Jun I need a car. What’s the best way to pay for it?

Q. I think I’m going to have to buy a new car because mine will need a lot of repairs and I don’t think it will be worth the cost. I know car prices are higher now and with interest rates going up, I’m not sure if I should get a regular car loan or use my home equity line of credit. It has a variable rate. What’s the best option?
— Borrower-to-be

A. You’re right that it’s a tough time to buy a car.

Even if you’re able to find a new set of wheels that you like, choosing the best funding option as interest rates rise is a challenge.

The best way to determine how to proceed is to try to calculate how much the loan is going to cost you in total, said Marnie Hards, a certified financial planner with Aznar Financial Advisors in Morris Plains.

She took a look at offers from NerdWallet.com, which showed if you have a credit score above 780, you may be able to get a car loan with a rate as low as 2.4%. For a used car, the rate was closer to 3.7%, she said.

“As your credit score declines, the interest rate you will be charged on an auto loan will increase making the loan more expensive,” Hards said. “For reference, if your credit score is between 601 and 660, the average rates are 6.7% for new and 10.48% for used. The average auto loan interest rate for new cars is currently 4.07% and 8.62% for used cars.”

You did not mention the actual interest rate on your home equity line of credit, but the average interest rate on a 20-year HELOC is currently about 6.85%, Hards said. And as you noted, this rate is variable which means it will fluctuate as general interest rates change.

If interest rates continue to go up, the interest rate on the HELOC will increase which will increase your out-of-pocket cost on the loan, she said.
If your credit is good and you can secure a car loan at a lower interest rate than your home equity line of credit, this is likely going to be the least expensive option for you, Hards said.

“You should be able to secure a fixed interest rate on the car loan unlike the home equity line of credit so you will not have to worry about the rate changing over the term of the loan,” she said. “Keep in mind that if you have access to one, credit unions are often a good place to look for low interest rates on car loans.”

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This story was originally published on June 29, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.