Danger of choosing a mortgage over a car loan

Car buyers who have chosen to increase the mortgages on their properties rather than take out car loans in order to pay for their vehicles could be setting themselves up for a fall. In the wake of rising utility, fuel and food bills, home owners who re-mortgaged their homes to pay for their cars could be facing increased repayments against a depreciating asset. Recent figures released from the Bank of England show that UK home owners have borrowed around £311bn since 2000 to finance purchases other than the properties themselves. This could mean people are throwing away money in unnecessary interest charges, because the money is repaid over such a long period of time. In fact, the car could end up costing twice its cost. For example, a car that cost £14,000 that was financed by taking out a mortgage at 7.2% could amass a total cost of £30,000 at the end of the agreement - whereas if the car had been bought with a standard car loan of 7.7% APR, the total cost would have been less than £16,000. Car buyers may have accepted that they will pay more in the long run, but choose to do so for the sake of lower monthly repayments. However, the issue of depreciation has to be considered: cars are worth less over time, whereas houses are worth more. Therefore, a car loan is the better option for getting the vehicle paid off at a lower cost. The customer can then trade in the car for a better model!

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