Should you use a HELOC to buy a car?
Usually not. A car loses value fast, and a HELOC makes it easy to pay for it for decades.
Reviewed by Shawn Way, NMLS #1007298★ 4.9 from 111 reviewsUpdated
Should you use a HELOC to buy a car?
Usually not. Auto loans for good credit are often close to HELOC rates, and dealer promotions can be 0%. A HELOC only makes sense for a car if the rate is clearly lower and you pay the car off in 5 years or less. Otherwise you're borrowing against your home for something worth less every year.
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If you do it
- Pay it off on a fixed schedule no longer than an auto loan would be.
- Lock the balance at a fixed rate if your lender allows.
Already have a car loan? See paying it off with a HELOC.
Use a free calculator, or get your HELOC rate from Shawn.
Example: $35,000 over 5 years
| Auto loan at 6.5% | HELOC at 7.75% APR | |
|---|---|---|
| Monthly payment | $685 | $705 |
| Total interest | $6,090 | $7,330 |
At a good-credit auto rate, the auto loan wins and keeps the debt off your home. The HELOC wins when the auto rate is clearly higher, such as on a used car, an older car, or with a lower credit score, where auto rates can run into the teens.
The cash-buyer advantage
Paying with HELOC funds makes you a cash buyer at the dealership, which avoids dealer-arranged financing markups and add-ons pushed through the loan. Negotiate the price first, before mentioning how you'll pay; some dealers discount more when they expect to earn on the financing.
Private-party purchases
Buying from a private seller is where a HELOC helps most: private-party auto loans are less common and often priced higher, and sellers prefer certified funds. Draw the money, get a cashier's check, and complete the title transfer at the DMV or a bank.
Rules if you do it
- Pay it off in five years or less, and before you'd replace the car.
- Set the payment by autopay; don't leave it interest-only.
- Remember the interest isn't tax-deductible.
Mistakes to avoid
- Paying interest only on a depreciating car.
- Taking longer than five years to repay.
- Buying more car than you would with a regular loan because the payment is lower.
Example: an older used car
A buyer with a 660 score finds a 7-year-old SUV for $22,000. The dealer's financing offer is 13.9% for 6 years: about $452 a month and $10,560 in interest. A HELOC at prime plus 1.75, paid over 4 years, costs about $545 a month and about $4,150 in interest. Shorter and cheaper, if the payment fits.
Also asked
Does the dealer care if I pay with HELOC money?
No. To the dealer, you're a cash buyer. Some dealers earn money arranging financing, so negotiate the out-the-door price before discussing payment.
Can I use a HELOC to buy a classic or collector car?
Yes, and it's one of the better uses, since classic car loans can carry high rates. Pay it off on a firm schedule; the car isn't collateral for the loan, your home is.
Can you use a HELOC with a car lease?
Only for the buyout. A lease has no loan to pay off with a HELOC, but if you want to buy out the lease at the end, a HELOC can fund the buyout, though a lease buyout loan may be competitive.
Should I pay cash from savings instead of using a HELOC for a car?
Often, yes. If you have the savings and paying cash won't drain your emergency fund, buying the car with cash avoids interest entirely and keeps the debt off your home.
Does a HELOC car purchase affect my insurance?
No lienholder is listed on the auto policy when you buy a car with HELOC funds, because the car isn't collateral for the loan; your home is.
Does the same HELOC advice apply to an electric car?
Yes, the same rules apply to an electric car. Compare the HELOC rate with any EV loan promotions, and pay the HELOC balance off within five years.
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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