Should I use a HELOC to buy a car?
Using a 30-year HELOC for financing a new car purchase
Key Takeaways:
Auto loans are the most popular way to pay for cars, trucks, and SUVs, followed by cash
A home equity line of credit, or HELOC, is a good alternative, using the equity you have in your home as collateral
Home equity lines of credit can have lower interest rates than auto loans, depending on your credit score
Home equity loans usually amortize over a longer period of time, significantly lowering the monthly payment amount
What is a HELOC and how does it work?
A home equity line of credit (or HELOC) is a type of home equity loan that is a revolving line of credit, meaning that you can draw money and make monthly payments as needed. It differs from a traditional home equity loan, which gives you a lump sum of cash at the start of the loan. It works in a similar way to a credit card but has significantly lower interest rates because it is secured by the collateral of your home.
Can you use a HELOC instead of an auto loan to buy a car?
Yes! A home equity line of credit is a viable option for financing a car or truck. The most common way to pay for a vehicle purchase is with an auto loan, followed by cash. But if you have built up equity in your home, a HELOC might be the best way to purchase a car while keeping your financial goals within reach. Choosing a home equity line that amortizes over 30 years can decrease your monthly payments when compared with an auto loan, making it easier to buy the car you need or want.
When you take out an auto loan for a car or truck, you borrow a specific amount of money to purchase a vehicle and the loan is secured by the vehicle. You agree to repay the loan over a set period of time, usually between two and seven years, with interest. The lender will typically hold the title to the vehicle until the loan is fully paid off.
When you use a HELOC to purchase a car or truck, you are approved for a certain credit limit based on the amount of equity you have built up in your home, and your home is the collateral that secures the loan. You draw an amount of money from that credit line, up to your credit limit, and use that to pay for the car in full. HELOC loan terms vary but usually include a 10-year draw period at the start followed by a 20-year repayment period. In this scenario, you will hold the title to the vehicle.
Advantages of Using a HELOC to buy a car
The use of a Home Equity Line of Credit (HELOC) to purchase a car can offer numerous benefits. One main advantage is that the interest rates are often lower than traditional auto loans available from banks, making it a more financially sound decision.
Even if your HELOC interest rate is slightly higher than that of an auto loan, monthly payments would be lower. This is because auto loans usually amortize over 5 years and HELOCs amortize over a longer period, usually 30 years. This means that you have greater spending power when it comes to choosing the automobile you want, without the limitation of budget-breaking monthly payments. A HELOC rate calculator can help you find out exactly how much your monthly payment would be if you use a HELOC instead of an auto loan.
Example: Comparing an auto loan versus a HELOC to buy a car:
The average price of a new car (https://www.kbb.com/car-news/average-new-car-price-tops-47000/) is currently just under $50K (https://cars.usnews.com/cars-trucks/rankings/suvs). A fully loaded SUV is upwards of $80K! Assuming a 60-month loan for a $50K vehicle at a 6% interest rate, you are looking at a roughly $1K monthly payment.
Conversely, if you utilized a HELOC to purchase the car and locked into a 30-year loan, your monthly payment would be roughly half of that.
Additionally, if you have good credit, you may be able to qualify for less expansive loan options. HELOC loans also give borrowers considerable negotiating power when it comes to buying cars since they tend to have larger credit limits than other loan types; and depending on the dealership, you may even be eligible for rebates if you pay full value upfront.
Disadvantages of Using a HELOC to buy a car
The primary drawback is the increased risk of foreclosure if you’re unable to repay your home equity loan. Even if you’re making car payments, the long-term nature of the loan could make it difficult for homeowners to pay off their balance. Additionally, when taking out a home equity loan, there are fees and closing costs which can add up quickly and require additional funds from borrowers.
On top of all of this, cars lose value over time, meaning that by the end of a long-term repayment plan on a home equity loan, you may have not gained any financial benefit from buying your vehicle in this way but rather just broken even or worse.
Finally, in case your car isn’t working properly at some point during the loan repayment period – however, due to normal wear and tear or something else – you could find yourself facing the prospect of needing to finance another vehicle while still paying back your home equity loan.
Conclusion: Using a HELOC to purchase a car
Using a 30-year Home Equity Line of Credit (HELOC) to purchase a car may be a good option if you’re hoping to get a better interest rate on the loan than what traditional car loans offer or are looking for lower monthly payments. Before committing, it’s important to consider the risks of using your home as collateral and the potential drawbacks of choosing long-term financing. If done responsibly, however, opting for a HELOC can provide much-needed relief and help you afford the right car or truck.
