There are a lot of ways to use a Line of Credit (LoC) but using it to buy a car is probably not one of them. One of the dangers of putting an automobile on a LoC is that if you miss a payment, the bank can simply deduct the money from your savings or chequing account. Or, in a worst case scenario, foreclose on your house.
But a more rational reason for not using a LoC is the unstructured nature of the loan. It’s what I call the “Never Ever Loan” because it never ever seems to get paid off. Once you have put a few purchases on your LoC, you start to lose track of whether the car is anywhere near being paid off. With a proper car loan, you know where you are at any point and you will eventually get it paid off. If you miss payments on a structured car loan, the worst that can happen is that the car gets re-possessed (not your home).
Some people are tempted to use their LoC because the variable rate they are getting is lower than the fixed rate available through the dealer (particularly on used cars). But a variable rate is just that…variable. Therefore, a fixed rate that is guaranteed for the full term of the loan and is fully open (to be paid off without penalty). So a fixed rate, structured loan (with regular set payments) is the preferred method of financing your new or used car.
If you are buying a used car that’s less than 5 years old, the car loan you get through the dealer should be better than what your bank can provide to you directly. That’s because the major banks have a huge dealer lending program that sees rates that can be as low as 4.9% to 6.9%. On older cars (and for weaker borrowers), rates are double or triple these levels. Right now, because pre-owned vehicles are a stronger focus at most dealerships (to make up for the fall off in new car volume and margins) car manufacturers and financial institutions have come up with much sharper pricing of rates for used cars than in the past. But if you are quoted a finance rate on a used car by your dealer, remember, the rate is negotiable if your credit is good. Also remember that loans under $10,000 carry the highest rates.
If you are buying a new car, very low (or 0%) finance rates are available for credit worthy buyers. These rates are subsidized by the car manufacturer to help the dealership sell cars. You may find that the rates are so low on a new car purchase that the monthly payments for a new car are very similar to those for a used car because the interest cost difference is greater than the list price difference. That’s why it makes sense to pay cash for a used car (if you have the cash) but finance a new car.