Home Equity Loan for Car Purchase: Getting a Home Equity Car Loan

Is a Home Equity Loan a Smart Choice for Buying a Car?

Naturally, the go-to method for purchasing a new car is through a car loan. There are other financing options besides auto loans. As a homeowner, you may be enticed to use your equity to buy those wheels through a home equity loan or its credit-line cousin, a HELOC. This method is very different from a vehicle loan. Choosing whether a home equity loan is the best option for a vehicle purchase? Here's how.

Key Highlights

  • Avoid tapping into your home's equity for a car purchase.

  • Home equity loans: longer terms and lower monthly payments but higher interest rates than auto loans.

  • Cars depreciate, so it's not worth jeopardizing your home ownership and risking foreclosure.

  • Tap into the power of home equity financing for a car and other exciting ventures, like a grand home improvement project.

Can I Use a Home Equity Loan to Purchase a Car?

To be honest, no. Try not to use house equity to purchase an automobile. Your house serves as security for a home equity loan. The lender may foreclose on your house if you don't pay on time. Translation: It could escape you.

Home equity lines of credit (HELOCs) are no exception. Can a car be purchased with a HELOC? Yes. But ought you to? Most certainly not, and for the same reason: that credit line risks what is probably one of your most valuable assets by using your house as security.

Suppose you plan to utilize the money for initiatives or costs that improve your financial or professional well-being, like remodelling your home or covering college tuition. In that case, taking advantage of your home equity is generally preferable. Since automobiles lose value over time, financing one with your property is pointless. However, real estate appreciates with time, significantly when improved.

But remember that cars depreciate. Your automobile will be worth substantially less after paying off a 15- or 20-year HELOC (plus interest). The depreciation of a brand-new vehicle is 60% in the first five years and 23.5% after one year.

Think carefully before getting a home equity loan to lower your interest rates. Previously, home equity loans had lower interest rates than auto loans, but that has changed. Many car loan offers are now lower or comparable to home equity rates: In December 2023, new vehicle loans had an APR less than one percentage point lower than home equity loans.

Closing costs for a home equity loan are usually 1% of the principal (but can be 2–5%). You wouldn't pay them with a car loan.

Advantages and Disadvantages of Using Home Equity to Buy a Car?

Home equity loans and HELOCs were popular since their interest was tax deductible if you itemized. The 2017 Tax Cuts and Jobs Act substantially changed that. It restricted interest deductions to home improvement, repair, and purchase, making itemizing deductions harder.

A home equity loan for a car nowadays offers more risks than advantages. Let's compare the pros and cons of buying a car using a home equity loan against a car loan.

Advantages:

Lower Payments Over a Longer Term:

This type of loan has a long repayment period, allowing you plenty of time to repay. A home equity loan can last up to thirty years, and that of an automobile typically goes up to five years. All other factors being equal, this longer timeframe may result in reduced monthly payments if you borrow the amount you need for the automobile.

Flexibility in How You Use Your Money:

An automotive purchase does not need you to use the whole amount of a home equity loan or HELOC. You could get a new car for twenty thousand dollars minus fifty thousand, which would be left as equity in the property, leaving thirty thousand for new kitchen fittings. 

It makes much sense to resort to this way rather than borrow on equity loans just to buy a car that you will later resell to make enough to repair your house's roof and flooring. You may be able to deduct kitchen interest if you itemize on your tax return.

Disadvantages:

Diminished Equity:

You are giving up partial property ownership when you take out a home equity loan, which has major ramifications. First of all, in an emergency, you could require that equity. In addition, you may discover that the debt you incurred between your initial mortgage and the home equity loan was excessive. If you ever need to sell the house or decide to do so, this negatively impacts your finances because home equity loans must be paid back in full when a house is sold.

A More Demanding Application:

Applying for home equity finance is similar to applying for a mortgage in that the lender will consider your ownership stake and the house's value in addition to your financials. In short, the approval process for vehicle loans takes weeks or even months instead of days.

Risk of Foreclosure: 

You can lose your house, a far more valuable asset than your automobile, if you cannot repay the home equity loan.

No Monetary Benefit: 

If you have had a home equity loan for decades, you can find yourself paying for something that isn't worth anything because autos lose value with time. You can even find yourself in the unpleasant position of repaying a home equity loan while buying a new car if your current vehicle is beyond repair.

Closing Fees: 

Upfront closing costs may be associated with some home equity loans. You could be better off using part (or all) of that money for a down payment on a vehicle loan if you can pay these.

Bottom Line

You may take out a loan against the equity in your house to buy a car, but doing so is risky. Before diving into home equity loans and HELOCs, exploring auto loan offers with rising interest rates is wise.

Assuming you're only using a home equity loan for a car purchase. Using your equity can still be a wise choice. However, utilizing the equity towards acquiring another vehicle or even a brand-new garage is still viable.

FAQs

Can one use home equity to purchase a new vehicle?

One can take a home equity loan and purchase an automobile. You may get a loan of this sort if you want to buy a car or another piece of property, and you can use the equity in your house as collateral.

How risky is a home equity loan for a car?

One danger is that you are putting your house up for collateral, which means you can lose it if you don't make loan payments as agreed. It's crucial to thoroughly weigh the possible outcomes before financing a car purchase with a home equity loan.

Can I buy a car without a home equity loan?

Conventional vehicle loans, personal loans, and leases are among the available possibilities. It is crucial to weigh each option's advantages and disadvantages before deciding.

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22 Feb, 2024

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