Is it cheaper to finance a car with my home loan?

If you want to save money and you have a home loan in place, should you use it to finance that new car, or should you opt for car finance instead? We take a look at the pros and cons of using your home loan vs. using car finance.

Ané Albertse

31 Oct 2023 · 14:24Buying a Car3 min read

A Closer Look at Financing: Home Loans vs. Car Loans in South Africa

In South Africa, understanding the ins and outs of financing is crucial, especially when it comes to major purchases like homes and cars. While it may seem like a no-brainer to use a home loan's lower interest rate for shorter-term debt like car finance, there's more to the story than meets the eye. We'll break it down for you, so you don't bite off more than you can chew. (Find out where you can finance a car with bad credit.)

Car Finance: Crunching the Numbers

Imagine you want to buy a car for R250,000. If you get car financing at a 13.75% interest rate for five years, you'll need to make monthly payments of about R5,680. Over those five years, you'll end up paying a total of R340,800, which includes interest and additional fees, adding up to over R90,000 extra costs.(Who can sign surety for your car finance agreement? Find out here.)

The Home Loan Alternative

Now, let's talk about your home loan, which still has 15 years left to be fully paid off. If your home loan allows you to access the equity you've built up, you might think about using it to finance your car. In this case, you'd only be paying a 9.75% interest rate, which sounds good.

But there's a catch. Your monthly home loan payment would go up by R3,180, making it seem more affordable than the R5,680 you'd pay each month for car financing. But let's get to the real costs.

(What about leasing a car? It may be an option worth exploring here).

How Much You'll Really Be paying

Over the span of 15 years, using your home loan to buy the car will cost you a total of R514,800, and out of that, R244,800 is interest. That's more than double the interest you'd pay if you went with the car financing option.

A Smarter Strategy

So, how can you make the most of the lower interest rate of a home loan? The trick is to increase your mortgage payment by the same amount you'd have paid each month for car financing. In our example, increasing your mortgage payment by R5,680 allows you to pay off the car in just 55 months, with a total cost of R312,400. That's a significant saving of R28,400 compared to the car financing option. (Can I buy a car with zero down payment? )

Debt Consolidation Consideration

The same ideas apply if you're thinking about rolling other debts into your home loan. Only consider using your home loan if you're confident that you can pay off the debt in a shorter time.

In South Africa, making good financial decisions can have a big impact on your long-term financial health. When it comes to financing, remember that what looks cheaper initially may not be the best financial choice in the long run.

Let's recap...

Pros and cons of car finance vs. home loan, to finance a car in South Africa:

Car finance:

Pros:
- Shorter loan term, typically 5-7 years
- Lower monthly payments
- Dedicated car finance products may offer additional benefits, such as gap insurance
Cons:
- Higher interest rates
- The total cost of loan is higher due to interest and fees
- If you default on the loan, your car could be repossessed

Home loan:

Pros:
- Lower interest rates
- More flexible repayment options
- You can borrow more money if needed
Cons:
- Longer loan term, typically 15-20 years
- Higher monthly payments, if you want to pay off the loan in a shorter period of time
- If you default on the loan, your home could be foreclosed on.

Additional considerations:

Using your home loan to finance a car may impact your credit score. This is because it will increase your total debt-to-income ratio.
If you have a limited amount of equity in your home, you may not be able to borrow enough money to finance a car.
If you plan on selling your car within a few years, it may be better to opt for car finance. This is because you will be able to pay off the loan more quickly and avoid paying high interest rates.

Source: Maya on Money

Watch her video titled Should you use your home loan to buy a car?

Written by Ané Albertse

Ané was bitten by the motoring bug at a very young age. Her mom recalls her sitting in her stroller as a 3-year old, naming every car that came past. She was creating content for various publications within Media24 when AutoTrader nabbed her for good, and is one of the longest-standing members of the AutoTrader team. She prefers dirt roads to tar and SUVs/bakkies to sports cars, but her greatest passion is helping people find the perfect car for their budget, lifestyle, and personality.Read more