Why You Should Think Twice Before Using Your Line of Credit to Purchase a Vehicle
When purchasing a new or new-to-you vehicle, it may seem that the best and easiest option is to pay
with your credit line. And it makes sense. For example, no jumping through hoops to get approved. Plus, flexibility in payments. And, you can pay it off any time you want… makes perfect sense, right?
But maybe not.
In this article we’re going to discuss the reasons why you should think twice before using a line of credit
to purchase a vehicle.
Tell it to me straight
We’re not going to dither about and make you read to the bottom of the article for the number one
reason against using a credit line. Because that’s how important this first one is:
The biggest drawback is that it’s a REVOLVING FORM OF CREDIT.
You can use it, make a relatively low payment, use it again. And you can keep this up on a revolving cycle like a credit card. For instance, you make regular payments, add debits to pay other bills, and the balance doesn’t actually go down. But the interest keeps accumulating.
It’s easy to think you’ll pay it off sooner, make the extra payments, and be debt-free sooner. But only a
small minority of people actually are able to do this, despite their best intentions. Unexpected bills come up, life gets in the way, and boom, you haven’t actually paid down your car.
There’s also a very real danger that you may never pay the car off and end up deep in debt. When it
comes time for buying your next vehicle, you may still be carrying a balance. As a result, there may no longer be credit available.
Plus, if you’re in this debit-payment cycle, you will have paid more interest overall compared to an installment loan.
That’s right. Running a high balance can impact your future credit. This is a relatively little known impact but can make a very big difference to Future You.
Interest rates fluctuate with prime
This means that your rate, and therefore your minimum payment, could go up at any time. This can make it harder to budget, especially if you’re banking on only making minimum payments.
Furthermore, lines of credit are designed for emergencies and investment opportunities.
Think of your line of credit as a last resort. And only use it when absolutely necessary.
They are a great option when you are in an emergency and need the money immediately. Situations when you have a big project such as a costly house repair or unexpected expenses, and have the means to pay it back on time. If you save your credit line for emergencies, the money you need will actually be available.
However, even in emergencies it’s important to not become reliant on a line of credit as there are many
flaws that are associated with revolving debt (see above).
Many lines of credit are secured
Having a secured line of credit means that it is tied to your house, and is considered a second mortgage. Failure to make full payment for any reason can result in repossession of your home.
Your Line of Credit is a Demand Note
Unfortunately, your peace of mind with a line of credit is quite thin. The bank has the option to demand
payment in full at any time. If you are unable to pay it off, they will use their “Right of Offset.” This
means that the bank can transfer cash from your other bank accounts to pay off the loan. The bank can
do this at any time without any cause.
If your credit score drops for some reason and your lender becomes concerned that you may not be able to repay your credit line, they can ask for full payment of the line of credit or lower your credit limit
drastically at any time.
Using a line of credit is rarely your best option for the purchase of a vehicle.
If the reasons we’ve listed aren’t enough to skip the line of credit, manufacturers are often ready to sweeten the pot. Many manufacturers offer promotional interest rates and loyalty incentives so that it makes even more sense to lease or finance.
Dealerships have so many buying options available for you, whether you plan to lease or finance.
There’s a purchasing solution for almost everyone.
We hope we’ve covered all the reasons why you should think twice before using a line of credit to
purchase a vehicle. If you have any further questions, feel free to reach out to one of our Financial
Services Advisors. They are here Monday through Saturday, and ready to help.
If you’d like get preapproved before you shop, head right on over here.