Personal Car Loan - How Do They Work

The first type of personal car loan is done through a home equity loan. With the current drop in home values across America, these types of loans are not as widespread as they used to be. But depending on the equity situation you have in your home and the area in which you reside, this type of personal car loan may still be available to you.

In its simplest terms, a home equity loan is a second mortgage. While banks in the past were able to lend up to 80 percent of your home's value, that percentage is certainly on the high side given current conditions in the real estate market. If you fall within your lender's guidelines, it is possible that this type of personal car loan could result in an APR that is lower than most conventional auto loans.

On the upside, the big benefit of a personal car loan based on a home equity loan is that the interest that you pay is tax deductible, provided you itemize your deductions on your income tax return. On the downside, unlike a conventional car loan, your home is the collateral for a personal car loan. If you can't make the payments, your car won't be repossessed, but your home could be foreclosed on.

The second type of personal car loan is done with a home equity line of credit. You apply for this type of personal car loan by requesting a line of credit from a bank based, once again, on the equity in your home. If approved, you write a check against this line of credit.

As with a home equity loan, the interest is tax-deductible. It also allows for payment flexibility. Rates, however, tend to be variable, so what started as a good deal could turn out to cost you more money than originally planned. This type of personal car loan is also structured for a longer period of time, meaning you could end up paying quite a bit more in interest than a conventional auto loan. Finally, just as with a home equity loan, any default could lead to the loss of your home.