Why Using your Line of Credit to Pay for your Vehicle just might be a Bad Idea…
A line of credit is a good asset to have on hand during emergency situations. Due to the easy accessibility to this pool of money, it gives you the peace of mind that if an unexpected bill arises, you will have the money to take care of it that you otherwise wouldn’t. Credit lines are convenient to use and can be life-saving at times. However, through our practice, we have noticed that a lot of people do not realize how credit lines actually work. They assume that the using a line of credit to pay for your vehicle is a good idea and they end up getting into some dangerous financial territory.
In order to save you a headache or two down the road, we have compiled three reasons for which we believe credit lines are not the best way to go when it comes to purchasing a vehicle.
Your line of credit should be your “Plan B”
The reason credit lines were first introduced was to provide borrowers with a “Plan B” – should an emergency take place, the borrower can take the money out as needed. For example, if your roof starts leaking unexpectedly, and you don’t have the money saved up to repair it, the line of credit will give you the ability to pay for those repairs and then slowly re-pay the borrowed amount. Now imagine you use up your line of credit towards purchasing a vehicle and three months down the road your roof starts leaking. Would you still be able to pay for those repairs? Emergencies like this do happen to all of us and this is why credit lines should be treated as a last resort.
With a line of credit you are at the mercy of the banks
Your line of credit is a demand note, which means that at any time the bank has the right to take away your line of credit and require you to pay it in full. Since they can do this with or without a reason, you have to be really careful whether you want to take that risk or not.
Credit lines have a variable interest rate
A little known fact is that your line of credit has an interest rate. While the interest rate on an auto loan is fixed, the rate on your line of credit can vary. So, if you were to borrow the money at 3.99%, it is absolutely possible that six months down the road, the interest could easily increase to 8.99% or more.
So, what can you do instead?
Securing an auto loan through our dealership and a banking institution is a much more reliable option. Not only is the interest rate fixed, but there are many other benefits that you can enjoy as well:
Auto loans are open-ended, which means you can pay them off at any time, without penalty.
Any additional money you put down over and above your payment will be applied directly to the principal amount and shortens the borrowing term, saving you a lot of money in interest.
Auto loans can strengthen your credit standing, given that you make all your payments on time.
Auto loans secured through a dealership offer more competitive interest rates.