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Should You Use a HELOC to Buy a Car?

Learn about the pros and cons of using a home equity line of credit (HELOC) to buy a car, including the risks and costs involved.

If you don’t have money in savings to pay cash for a car, one option is to apply for an auto loan. You can arrange financing through the dealership or a bank.

From here, you can make monthly payments and pay off the car loan in about 3 to 5 years, on average.

Although auto financing is a common and popular way to purchase a car, it’s not the only option available.

It might come as a surprise, but some people also use their home equity to purchase a new or used car, namely a home equity line of credit (HELOC). 

But while an option, is this a good idea?

Here’s what you need to know about home equity lines of credit, and why someone might use one to buy a car.

What Is a Home Equity Line of Credit?

A home equity line of credit, or simply HELOC, is a line of credit secured by a home’s equity. 

It’s a revolving credit line comparable to a credit card.

Typically, you’re approved for a certain amount based on:

  • your income
  • credit history
  • the amount of your home equity

You can then borrow from this line of credit on an as-needed basis. 

Homeowners use HELOCs for many purposes.

Some use the line of credit to consolidate debt, make home improvements, pay for college tuition, and even start a business. In addition, others borrow against their equity to purchase a new or used car. 

Before you choose this financing method, though, weigh the pros and cons of this decision.

Why Might Someone Consider a HELOC to Buy a Car?

If you’ve lived in your home for many years, chances are that you’ve built up a lot of home equity.

So, when the time comes to buy another car, you might consider a line of credit over auto financing to purchase a vehicle. 

Here’s a look at possible benefits of purchasing a car with a HELOC:

1. Longer repayment term

When financing a car through a dealership or bank, you’re typically given between three and five years to repay the loan. For many people, this is enough time, and this term results in affordable monthly payments. 

But what if you’re buying a more expensive car or want a slightly longer loan term? 

The bank that approves your auto loan might not allow a six or seven-year term, especially with a used car.

In this scenario, you might consider using a HELOC for the purchase. These lines of credit generally allow repayment terms up to 10 to 15 years. 

While you might not need this much time to pay off the balance, a HELOC does come in handy when you want to extend payments and minimize your monthly obligation.

2. Lower interest rate

Then again, maybe you plan on paying off the car in three, four, or five years? Does it still make sense to finance a car with a HELOC? 

Well, the answer really depends on your credit score. 

Some homeowners use a HELOC to buy a car because the interest rate on the line of credit is sometimes lower than the interest rate on a traditional auto loan. 

Auto loan rates can fluctuate from year-to-year and even day-to-day, as do rates on home equity lines of credit. 

Now, if you have good credit, you might qualify for a low rate regardless of how you choose to finance the car. Yet, after some comparison shopping, you may discover that a home equity line of credit offers the lowest interest rate and the lowest monthly payment.

3. Increase bargaining power

Since you’re not securing your financing through the dealership, using a home equity line of credit to purchase a car also gives you bargaining power. 

Some car finance companies offer low-rate financing incentives to those with excellent credit.

However, if you take advantage of these incentives you’re typically not eligible to receive a cash back rebate, which reduces the price of the vehicle. You can only choose one or the other. 

But if you secure your own financing using a HELOC, and walk into a dealership ready to buy a car, you can receive the dealership’s rebate offer and save on the purchase price.

Therefore, using a home equity line of credit lets you enjoy the best of both worlds.

4. You don’t plan to move

It might also make sense to use a home equity line of credit if you have no plans of selling your property.

A HELOC creates a second mortgage.

So if you were to sell the home, you would have to pay off your first mortgage and the second mortgage before receiving proceeds.

Selling the home while owing a balance on your line of credit eats into your profit, meaning you’ll have less money to put down on your next home.

Why It’s Not a Great Idea to Use a HELOC to Buy a Car

Although using a HELOC for a car purchase might make sense in some circumstances, it doesn’t make sense in others.

Here’s why:

1. You’re putting your home on the line

Again, a HELOC is a second mortgage.

Remember that failure to repay the line of credit —maybe due to financial hardship—puts you at risk of losing your home

Your property acts as collateral for the line of credit. In addition, using a HELOC to buy a car ties your home to a depreciating asset. Car values gradually decline over time. 

When getting a HELOC, it’s better to use funds in a way that benefits your personal finances. This is why some people put funds toward an investment. 

Others use a home equity line of credit for renovations and home improvement projects. These repairs can increase the value of their home. 

Or, they use a HELOC to consolidate their debt at a lower interest rate. This can help pay off high-interest balances faster and increase their credit score.

2. You could end up paying more interest

You can save money when using a low-rate home equity line of credit for a car purchase. But only if you pay off the line of credit within a reasonable time frame. 

If you extend your payments over eight, nine, or even 10 years to get a low monthly payment, you’ll also pay more in interest over time. 

Keep in mind:

Under new laws, you can only deduct interest paid on a home equity line of credit (and home equity loan) when you use funds to purchase or improve a home.

Interest is not tax-deductible when funds are used for non-property related expenses.

3. Home equity lines of credit have closing costs

Another thing to keep in mind is that some HELOCs have closing costs. These fees can range from 2 percent to 5 percent of the total line of credit. 

You can pay these fees out-of-pocket at closing.

Or, negotiate a no-closing costs HELOC. Avoiding closing costs may require keeping the line of credit open for a certain number of years, and paying a higher interest rate.

4. Home equity lines of credit have variable rates

Unlike your first mortgage which might have a fixed interest rate (meaning your interest rate doesn’t change over the life of the loan), many HELOCs have variable rates.

So your interest rate can change based on market conditions. 

Changing rates can cause your monthly payments to fluctuate, either increasing or decreasing.

Should You Use a HELOC to Pay for a Car?

Only you can decide whether to use a HELOC to buy a car.

But given the risk associated with financing a car using your home’s equity, you’re probably better off with an auto loan through your bank or the dealership

The cons of using a HELOC greatly outweigh the pros.

You’re tying your home to a depreciating asset. And the fact that many HELOCs have variable interest rates means you could end up paying more money over time.

Using a HELOC might make sense if you’re very financially stable, though. Just make sure you seriously weigh the pros and cons to avoid running into financial problems. 

If you don’t want to use traditional auto financing for a car, you might also consider an unsecured personal loan. These loans aren’t tied to your home, and they’re also likely to have a fixed interest rate. 

You can start off with traditional auto financing.

And then once you’ve paid down some of the loan balance, use your home equity to pay off the remaining balance. This way, you’re able to minimize the amount owed on your HELOC. 

This might be an option if interest rates on HELOCs decrease and become considerably lower than auto loan rates.