Equity lines of credit are usually home equity lines of credit and are tied to the equity in a residential home. The Federal Trade Commission recommends home equity lines of credit for significant purchases or expenses such as tuition payments or medical expenses. Ideally, you should not use home equity loans at all, according to the FTC, but the agency acknowledges that low-interest rates provided by the loans make them ideal for some purposes. However, the FTC does not recommend using a home equity line of credit to buy a car.
Depreciation
Automobiles decrease in value as they age, with some people owing more on the car than it is worth shortly after they purchase it. That is a key reason why it is usually a bad idea to use a equity line of credit loan to purchase an automobile. Doing so ties up a chunk of your credit line for a rapidly declining asset. Using the credit lines to pay tuition is a lot different. Tuition is an investment that could lead to a better life for you or your children.
Risk Factors
The FTC takes a dim view of using home equity lines of credit for automobiles and other frivolous purposes such as vacations, timeshares, boats and even debt consolidation. Excessive home equity debt can lead to foreclosure if the homeowner is not able to make payments because of job loss, illness or reduced income. It is never a good idea to default on any loan, but losing an automobile to repossession in a separate loan is usually preferable to losing a home to foreclosure.
Guidelines
People with low credit scores and sound finances generally keep balances low on all accounts -- including equity lines of credit. Keeping equity loan balances to no more than 10 percent of the credit limit is a sound strategy for avoiding excessive debt and keeping credit scores high. People who do wish to buy a car using an equity line of credit should confirm that they can make the purchase without spending more than 10 percent of their credit limit.
Considerations
Even the strategy of using just 10 percent of the equity presents risks. After using 10 percent of the equity credit limit on a car, a person may experience a medical emergency or some other important expense requiring additional use of the credit line. Such developments could lead to excessive debt, caused in part by using the equity credit line to purchase an automobile.
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