With 4 ways to finance a classic car, which is the smoothest ride?

The situation: John wants to honor his dad, Henry, by buying him a perfectly restored Ford Mustang convertible from a private seller for $75,000. Henry had worked multiple jobs in his early 20s to buy a similar car, and he and John’s mom have a lot of great memories associated with it.

The approach: John begins by doing an online search for various loan alternatives, but he ultimately concludes that he would benefit from discussing the situation with his financial professional.

1. Personal loan
John begins looking at options and starts by gathering information on a personal loan to purchase the car. The lowest rate he can obtain is 8.99%, but it is for a 24-month loan, and that means substantial monthly payments of $3,426. If John is willing to extend the term, he can lower his payments to $1,676 a month, but he’d be paying an interest rate of 12.21%, and that would end up costing $25,578 in interest over the duration of the loan.¹ John intends to pay back the loan over the next 5 years, but he’d prefer not to be locked into monthly payments as high as these.

2. Home equity line of credit (HELOC)
John thinks there has to be a better way to pay for the vehicle, so he looks at a HELOC. Because he will not be using the proceeds to substantially improve his primary or second home, the interest on the HELOC will not be tax deductible. Based on the average rate on a HELOC today of 9.16%², he is quickly able to calculate his total interest expense of $34,350 over the same 5-year period with minimum monthly interest payments of $573, assuming the prime rate stays constant. Hoping to find additional alternatives, John reaches out to his financial professional.

3. Liquidating assets
John asks his financial professional whether liquidating appreciated assets to pay for the car is a viable option. He’s had his money invested in the stock market for almost 10 years, and it’s done well. His financial professional runs the numbers and concludes that to generate the $75,000, John would trigger a capital gain and have to pay $6,891 in capital gains taxes when he files next year. Calculations assume the assets were invested in the S&P 500 for the past 10 years. John falls into the 15% capital gains tax bracket.³ Moreover, his financial professional points out to John that he will lose any potential upside that might come from leaving his money in the market. If the market continues to return its long-term average since 1969 of 10.28%, that $75,000 may appreciate to about $122,000 over the next 5 years.⁴ So when John thinks about the cost of liquidating, it totals about $53,891 ($6,891 + $47,000).

4. Securities-backed line of credit (SBLOC)
John’s financial professional recommends a fourth option — an SBLOC — and runs more numbers to determine what it will look like to pay for the car using that method. The financial professional can get John a line at a 1-month SOFR* (5.30%) plus a margin of 2.25%.⁵ Over 5 years, John will pay $30,263 in total interest with low monthly payments of $504 (assuming the SOFR stays constant). He can pay more if he’d like, and that will lower the amount of interest he’d owe over the life of the line, but he’s obligated to pay only $504.

* The Secured Overnight Financing Rate (SOFR) is subject to change.

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[1]  Based on a Bankrate.com survey, as of April 2024 the average rate for a personal loan was 11.31%. The interest rate and APR will vary depending on the credit score, the lender and the fees associated with the loan.
[2] Based on a Bankrate.com survey, as of April 2024 the average rate for a HELOC was 8.74%. The interest rate was based on an 80% LTV and good credit. The APR will vary depending on the lender and the fees associated with the loan.
[3] An estimate of your capital gains tax liability is based on your adjusted gross income, tax filing status and cost basis in your investments. Cost basis is calculated by assuming the funds have been invested in the S&P 500® throughout the investment holding period that you selected. Taxes are based on the IRS income tax rates for the current tax year.
[4] The estimated appreciation in value if the investment portfolio remained invested in the market is based on the average yearly rate of return of the S&P 500® since 1969.
[5] The interest rate of 8.07% is based on an index of 5.32% plus a margin of 2.75% as of June 3, 2024.