Paying off a car loan with a HELOC
A car loan is already a secured, mid-rate loan, so the savings are smaller than with credit cards. It can still make sense, with one rule.
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Should you pay off a car loan with a HELOC?
Only if the HELOC rate is clearly lower and you pay the car off no slower than the original loan would. On $28,000 at 9.5% over 5 years, moving the car loan to a HELOC at 7.75% APR with the same 5-year payoff saves about $1,400 in interest and $24 a month.
On this page
The numbers
| $28,000, 5 years | Monthly | Interest |
|---|---|---|
| Car loan at 9.5% | $588 | $7,283 |
| HELOC at 7.75% APR | $564 | $5,864 |
Use a free calculator, or get your HELOC rate from Shawn.
The rule: don't stretch it
If you pay the car off over 15 or 20 years on a HELOC, you'll pay more interest than the car loan would have cost, and still owe money on a car you've sold. Set a HELOC payoff payment that matches the car loan's remaining term or beats it.
When to leave it alone
- The car loan rate is under about 7%: the gap is too small to cover any HELOC costs.
- Less than about 18 months remain on the loan.
- You'd be opening a HELOC just for this. It makes more sense folded into a larger consolidation.
The example in full
| Car loan at 9.5% | HELOC at 7.75% APR | |
|---|---|---|
| Balance | $28,000 | $28,000 |
| Payoff period | 5 years | 5 years |
| Monthly payment | $588 | $564 |
| Total interest | $7,280 | $5,860 |
The savings are real but modest: about $24 a month and $1,400 over five years, before any HELOC closing costs. On a car loan at 5% or 6%, there's usually nothing to gain. At 12% and up, common on used cars and for lower credit scores, the case gets much stronger.
If you owe more than the car is worth
Using a HELOC to pay off an underwater car loan moves the shortfall onto your house. If you plan to trade the car in soon, compare paying down the negative equity directly. If you keep the car, a lower rate can still help you catch up faster.
Practical details
- Title. Once the auto loan is paid, the lender releases its lien and you receive the title (or an electronic lien release, depending on your state). Keep it safe.
- GAP insurance. If you bought GAP coverage with the loan, paying the loan off early often entitles you to a prorated refund. Ask the dealer or lender.
- Insurance. Your auto insurer may no longer need to list a lienholder. Update it so claim checks come to you.
- Prepayment. Most auto loans have no prepayment penalty, but check, especially on precomputed-interest loans.
More questions
Can I use a HELOC to buy a car outright?
Yes, and paying cash can help you negotiate. Treat it like a car loan anyway: pay it off within the car's useful life, ideally 3–5 years. Buying a car with a HELOC.
Is HELOC interest on a car deductible?
No. Interest is deductible only when the money is used to buy, build or improve the home securing the line.
Before paying off a car loan with a HELOC
- Get your auto loan's payoff amount and check for prepayment penalties.
- Compare the rate gap: under about 2 points, it's rarely worth it.
- Set the HELOC payoff to match or beat the remaining auto loan term.
- Ask about a GAP insurance refund.
- Watch for the title or lien release from the auto lender.
Also asked
Can I use a HELOC for a classic or collector car?
Yes, a HELOC can pay for a classic or collector car, and it can be cheaper because specialty classic-car loans often carry higher rates and shorter terms. Keep the same discipline as any car loan: a firm payoff in five years or less.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Publication 936, Home Mortgage Interest Deduction · Internal Revenue Service