Summary
Using a HELOC for a car is risky and generally not recommended.
Pros of using a HELOC to buy a car:
- Lower Monthly Payments: HELOCs offer longer repayment periods, potentially resulting in lower monthly payments compared to traditional auto loans.
- Flexibility in Fund Use: HELOC funds can be used for a variety of purposes, not limited to car purchases.
- No Need for Lender Approval for Additional Draws: If you have an existing HELOC, you can draw extra funds for future vehicle purchases without lender approval.
Cons and risks of using a HELOC to buy a car:
- Higher interest rates and fees: HELOCs often have higher interest rates and longer repayment periods. When compared to an auto loan, you will pay more over time.
- Longer repayment term: You will be paying for the car longer than its lifetime.
- Risk of losing your home: Using your home as collateral for a HELOC puts your home at risk if you can’t make timely payments
- Variable interest rate: HELOCs typically have variable interest rates,your payments may unexpectedly increase.
A home equity line of credit, also known as a HELOC, is a type of home equity loan that gives you the flexibility to draw funds to be used for nearly any purpose, including the purchase of a car. So, can you use a HELOC to buy a car? Short answer is yes… but should you use a HELOC to buy a car? Generally, no — keep reading this post to learn why.
A home equity line of credit is one alternative to a traditional car loan, but while it can be used to buy a car, it’s not usually recommended. Vehicles are depreciating assets, and using a HELOC to finance one also puts your home at risk if you’re no longer able to make timely payments.
If you’re thinking about using a HELOC for a car purchase, we’ll go through the differences between HELOCs and traditional auto loans, as well as the pros and cons of each financing method.
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What is a HELOC & how does it compare to a regular car loan?
A HELOC can give you access to funds based on the equity you have in your home. It’s a revolving line of credit that allows you to continuously draw funds up to your specified credit limit. It uses your home as collateral for the loan, which gives your lender the ability to foreclose should you fail to make timely payments.
A car loan, on the other hand, is secured by the vehicle itself. The exact rates, fees, and other terms you get will vary depending on the lender you choose and the vehicle you decide to finance. However, you’ll typically find the following typical differences between these two forms of financing:
| HELOC | Auto Loan | |
|---|---|---|
| Approval and Funding Speed | 21 to 45 days | 24 to 48 hours |
| Amount of Documentation Required for Approval | Significant paperwork required | Minimal |
| Interest Rate* | 8% and up, variable | 7% to 12%, fixed |
| Repayment Term | Up to 30 years | Typically 5 to 7 years |
| Loan Fees | Typically 1% to 3% of the loan amount | 0% to 1% of the loan amount |
| Collateral Required? | Yes; your home will be used as collateral | Yes; the vehicle being financed is often used as collateral |
| Required Down Payment | Typically requires 10% to 20% home equity | 0% to 10% |
The HELOC loan process
Getting a home equity line of credit is a process that usually takes between 21 and 45 days to complete. Much of this time is needed by the lender to accurately assess the risk associated with issuing this type of loan. HELOCs involve a detailed look at your credit, income, existing debts, and property.
As part of getting a HELOC, lenders will often require a property appraisal inspection to be completed. This is done to verify your home’s value and condition and typically takes the most time. Since HELOCs give a lender the right to foreclose to recoup some of its losses in the event of a default, lenders will want to ensure that there are no issues that might otherwise make it difficult to resell the property in the event of foreclosure. We recommend viewing our tips on how to increase your home’s appraised value.
Once you’ve been approved for a HELOC, the lender will give you instructions on how to use the account. Borrowers typically draw funds electronically from the HELOC, and when funds are deposited to a bank account, the money can then be used for virtually any purpose, including the purchase of a new car. Check out our guide to help you figure out how much you might be able to borrow.
The car loan process
Auto loans can typically be issued much more quickly, largely because assessing the value of a vehicle is far less complex than that of a home. Additionally, when you apply for an auto loan, a lender may require a minimum down payment amount depending on the purchase price or value of the vehicle. The larger the down payment, the less risky it is for the lender, as it makes it more likely that it can recoup its losses in the event of a loan default.
Otherwise, getting approval on an auto loan is often easier than a HELOC, as the underwriting guidelines are not as strict. Once you’re approved, the lender can then issue you a check made payable to the car dealership or wire the funds directly to them. Funds on an auto loan must be used for the approved vehicle, so unlike a HELOC, you won’t have the flexibility to use the money as you please.
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Benefits of using a HELOC to buy a car
While we don’t generally recommend using a home equity line of credit to purchase a vehicle, it does carry some benefits. If any of the following appeal to you, then using a HELOC may be a good fit for your circumstances:
Lower monthly payments
HELOCs can allow for up to 30 years to repay a loan, whereas most auto loans allow for up to 7 years. With your monthly payments being spread over a longer period of time, using a HELOC to buy a car can mean lower, more affordable monthly payments.
Flexibility in using funds
When you make a draw from a HELOC, you can have the funds deposited to your bank account. The money can then be used just like any other cash that you have. As a result, the use of a HELOC affords you the flexibility to also use it for other non-vehicle expenses such as debt consolidation. Funds on an auto loan, by comparison, are limited to the purchase of a vehicle.
No lender approval is needed for additional draws
HELOCs generally allow you to draw additional funds for up to 10 years. As a result, if you decide to purchase another vehicle in the future, you won’t have to worry about getting approved for another loan. An auto loan approval, by comparison, is typically only good for 30 to 60 days.
A HELOC can also be useful if you already have one but are unable to get approved for a new auto loan due to a recent change in your financial circumstances. If you have the available credit on a HELOC, you can draw additional funds for the purchase of a new car without needing to get your lender’s approval to do so. However, you should ensure you can afford the monthly payment, as lenders don’t typically turn down a loan unless they have concerns over your ability to make monthly payments on time.
Downsides & risks of using a HELOC to buy a car
If you’re trying to figure out whether to use a home equity line of credit or a different form of financing to buy a car, below are some of the downsides and risks to consider.
You could pay more interest charges over the life of the loan
In addition to having a higher interest rate, HELOCs have a longer loan repayment period. While this translates to lower payments, it could also mean that you’ll end up paying significantly more for your vehicle than if you had financed it with a traditional auto loan.
You pay more closing costs to get a HELOC
In addition to paying higher interest rates on a home equity line of credit, you’ll also pay more in closing costs and loan fees. In general, you’ll end up paying between 1% and 3% of the HELOC loan amount in fees. Car loans, by comparison, typically carry closing costs of less than 1%.
Your monthly payment amount could change
HELOCs tend to have variable interest rates. This means that your payments could increase over time. Fluctuating payments could also make it more difficult to manage your personal finance budget. Auto loan rates, by comparison, are almost always issued with a fixed interest rate, ensuring that you’ll have the same fixed monthly payments for the life of the loan.
You risk losing your home in foreclosure
When you get a home equity line of credit, you agree to use your home as collateral for any money you borrow. This allows the lender to foreclose on your home if you fail to make timely payments. While foreclosure timelines vary based on where you’re located, auto loans do not carry this risk. Auto loans only use the vehicle being financed as collateral, and while defaulting on loan payments would result in a repossession of your vehicle, it would not impact your home.
It takes longer to get a HELOC
If you want or need to purchase a vehicle quickly, a HELOC may not be the right fit for you. HELOCs can take between 21 and 45 days to get approved and funded. Auto loans, by comparison, can have approvals issued in as little as 24 hours.
For more details, head over to our article that details how long it takes to get a HELOC.
You are sacrificing home equity to acquire a depreciating asset
Using a HELOC means you will have less equity in your home, making it difficult for you to build wealth, which is why we only recommend using a HELOC for things that will have a positive return on investment. Some examples include debt consolidation, paying off high-interest-rate debt, or paying for home improvements and repairs. Using a HELOC to buy a vehicle reduces your equity and obligates you to pay interest charges on a depreciating asset.
What about using a home equity loan to buy a car?
A home equity loan is similar to a home equity line of credit (HELOC). One major difference is that funds for a home equity loan are issued in a single lump sum, with no flexibility to draw additional funds. Home equity loan rates also tend to be fixed, as opposed to the variable interest rate that most HELOCs carry.
With that being said, we also recommend exploring other financing options before using a home equity loan to purchase a vehicle.
Should I use a HELOC or home equity loan to buy a car?
We don’t generally recommend using a home equity loan to buy a car because the cons generally outweigh any benefits you might get. The interest rate on a HELOC tends to be higher than a traditional auto loan. You’d be using your home’s equity to purchase a depreciating asset, and you could risk losing your home in foreclosure if you default on the loan. With that being said, there are some scenarios in which a HELOC could be the right financing type to purchase a vehicle, but you should carefully consider the risks before doing so.
