Choosing Make, Model, and Financing

The big thing about a new vehicle typically is the price tag. The big thing about paying for it is how much you can save by financing it through Air Force Federal Credit Union. Interest rates on our conventional vehicle loans are attractive right now but there may be another option that could benefit you even more.

That’s because with a home equity loan or line of credit, you get a great rate and a tax break as well. If you itemize deductions on federal income taxes, your after-tax interest rate is lower because you can deduct home equity loan interest (confirm with your tax adviser).

So don’t look at rate alone to determine which type of loan will save you more. To give a home equity loan a fighting chance, think in terms of the rate--after taxes.

Say the home equity loan or line carries a 7.75% interest rate. If you're in the 28% tax bracket, you can think of that 7.75% rate as being 28% lower--in other words, 5.58%. You'd be hard pressed to find an auto loan rate to match or beat that.

Remember to consider upfront costs: As with any mortgage loan, you're likely to pay fees for the appraisal, title insurance, title search, credit check, and so on. And if you pay fees out of pocket, remember they increase your cost of borrowing.

Another tip: When making comparisons between a home equity loan and a conventional vehicle loan, use the same number of months for each. In other words, compare a 72-month auto loan with a 72-month payback on a home equity loan.

The result won't tell the whole story because the interest rate for a home equity loan typically will be higher than for a conventional auto loan. That means your monthly payment may be higher even if the final after-tax cost turns out to be lower. And, home equity loans often have variable rates, so be prepared for your rate to adjust upward.

Finally, before using this type of loan to buy a vehicle, make sure you don't have other priorities for your home equity - such as paying education expenses, starting a new business, or improving the house.