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Car Owners Beware: 5 Reasons NOT to Use a Line of Credit to Make Payments

Posted by Auto Loan Solutions on June 01, 2015 @15:31:46 EDT

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A credit line can actually serve as a lifeline. When an emergency strikes, a line of credit can help you pay expenses that you might not be able to pay for on your own. But there’s a problem – too many people don’t understand how a line of credit works, and end up using one to pay for a car. This isn’t the best idea. Although it works for some, using a line of credit to buy a car can put you in dangerous territory.

Why Avoid Using a Line of Credit to Buy a Car?

Depending on who you bank with, you have probably spoken to a financial advisor who has recommended that you take a line of credit at some time or another.

You may have hesitated to take it, especially if you had good credit in the past.  Or you could have readily accepted it based on the benefits given by your financial advisor. There’s nothing wrong with applying for one, as long as you know how it works and how to use it. But as mentioned above, the use a line of credit for a car purchase is not the best idea, and here are the reasons why.

Lines of Credit are Interest-Only Loans

Remember, a line of credit doesn’t work like your chequing account – a credit line has interest charges on top of it. And the longer you take to pay it off, interest rates will only add to your debts. The result is an increase in your debt and a reduction of your assets, which can take a toll on your credit score if you don’t pay it back over time.

Fluctuating Interest Rates

Another reason to exercise caution is that lines of credit have variable rates – they are not fixed. It gets difficult trying to calculate your debt totals in such instances. And when it comes to your finances, you never want to be in the dark.

They’re a Last Resort

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If you see a recurring theme throughout this post, you’ll most likely realize the message is to use your line of credit as a last resort. Use a line of credit only when necessary – they’re a backup plan for your backup plan. So if you were to use it to make car payments while allowing other liabilities to increase, you could eventually find yourself in a debt spiral.

Your Line of Credit is a Demand Note

A somewhat frightening reality of credit lines, is your bank’s ability to demand full payment for them at anytime. They can do so with or without cause, and if you don’t have the cash to do so, they can use what’s known as their “Right to Offset”.

Basically, this means they can seize whatever funds you have if and when they choose, and it’s perfectly legal (it’s written in your contract). People who face this are often surprised to find their accounts drained, and often get a lot of pressure from their banks to pay the money they owe.

Creditors May Consider a Line of Credit as a Mortgage

Credit lines generally fall under two types, secured and unsecured. If you have a secured loan, it will be tied to your home, meaning creditors see it as a second mortgage. Now this is fine if you can make regular and timely payments. However, defaults in payment (failure to make a payment for whatever reason) can lead to the bank repossessing your home. Hopefully, you won’t miss any payments, but if your circumstances get too difficult, you may start to lag behind.

Circling the Line Without Crossing It

Understandably, paying for a car isn’t easy for everyone. This is certainly true if you are juggling multiple debts. That’s why using a line of credit for a car purchase may seem like the best option at the time. Now unless you’ve reached a complete dead-end, it’s certainly better to find other means to make your car payments easier.

Line of Credit Alternatives

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  • Tweak your spending habits – You’d be surprised how much money you can save just by re-evaluating your budget, especially when it comes to seasonal purchases. Cutting out unnecessary expenses throughout the month may allow you to tap into more of your own cash. With that said, you can use it to make those car payments you have trouble with.

  • Refinance your car loan – Your auto loan isn’t necessarily a fixed deal. Rates can drop. If that happens, you may be able to refinance at a lower rate, allowing you to make smaller payments and save over time. If timing is the issue, you can tweak the schedule so that you can pay at a time that accommodates you best.

Think Twice Before Using

If you’re struggling with financial problems and can get approved for a line of credit, then it’s worth getting one. You can pay off your debts and escape the worst when it comes to your finances. However, beware of using a line of credit to buy a car. Relying on regular financing or leasing plans is a much safer gamble since you’ll avoid many of the consequences mentioned throughout this post.

Remember, every transaction you make and every payment method you use affects your credit in some way. Understanding how a line of credit works can prevent your score from falling, giving you a better chance for a more secure financial future.