If you have a vehicle credit, and you own a real estate free of charges and encumbrances, you have a chance to pay less for that loan. Below I explain the strategy that allows you to pay a vehicle credit before. The proposed strategy is that you require a home equity loan, and use that capital to cancel the vehicle loan. It may be strange to recommend that you take on a new debt to cancel another, but as you will see, this has a set of advantages.
Before pointing out these advantages, it is required that you know the following information.
Differences between a vehicle loan and a home equity loan
In the two loans indicated, the financial institution grants you an amount of money, and in return, you acquire a payment commitment. The profit that the institution obtains for its service, is given by the collection of an interest rate, which applies to the capital provided.
In both cases, the bank requires you to deliver some good as collateral, which it can use to recover the capital owed, in case you fail to pay. And this is where the first difference appears:
- In a vehicle loan, the good used as collateral is the same vehicle purchased.
- In a home equity loan, the guarantee is given by a real estate, that is, a land, home or office.
However, for the grantor of the loan it is more risky to confer a vehicle loan than a home equity loan. In short, due to the particular nature of each asset, a vehicle is more prone than a home to suffer a serious accident, which significantly decreases its value. And also a vehicle depreciates at a much higher speed, than does a home.
Then, it is logical that financial institutions apply a higher rate in the case of vehicle loans, compared to home equity loans. For sample, a button: in November 2019 the average annual interest rate of the Peruvian banks was 11.7% for the first, and 7.1% for the second.
Advantages of the proposed strategy
The advantages of paying a vehicle loan with this strategy before are the following:
- You immediately cancel the payment of the vehicle credit, so you can fully exercise your right to ownership of it. That is, you can sell or rent it, without restriction.
- It is possible that even the credit will be more economical, given the difference between the interest rates of the aforementioned credits. But do not forget to add when comparing, the costs associated with both credits, such as insurance and operating expenses.
- Here at us we can help you find the home equity loan that best suits your particular financial situation.