Should you use home equity to buy a car?

When it's time to purchase a new vehicle, most people consider taking the traditional route—exploring financing tools like auto loans or leasing. 

However, if you're a homeowner, you may have an additional option at your disposal—home equity. Products like home equity loans, home equity lines of credit (HELOCs), and even home equity investments (HEIs) can all help you tap the cash you need. But is it a smart financial move?

This post will explore vehicle vs. equity loans and the pros and cons of using home equity to buy a car.

When it's time to purchase a new vehicle, most people consider taking the traditional route—exploring financing tools like auto loans or leasing. 

Home equity loan vs. car loan

Home equity loans offer a single lump sum payout in exchange for fixed monthly payments. Of all the equity products on the market, home equity loans work most similarly to traditional car loans. 

Using a home equity loan to buy a car can give you a 5 to 30-year repayment term, which can make monthly payments more affordable—but increase the total interest paid over time. 

Auto loan vs. home equity loan key differences:

• Collateral: Home equity loans leverage your property, while auto loans are secured by the vehicle itself. 
• Interest: Both have fixed interest rates, with home equity loans generally having a lower rate. 
• Repayment: Auto loan repayment terms are 2 to 7 years, whereas home equity loans range from 5 to 30. 
• Fees: A home equity loan will require closing costs and appraisal fees, while car loans only require a flat origination fee. 

HELOC vs. car loan

When you use a HELOC to buy a car, you get an open line of revolving credit to draw from as needed for a 5 to 10-year period. During the draw period, you'll only owe interest on what you've used. Once the draw period ends, you'll be responsible for paying back the entire loan plus interest. This can provide a financial buffer if your cash flow is tight. However, it's always best to pay off your HELOC quickly and limit your overall borrowing costs.

Auto loan vs. HELOC key differences:

• Structure: You'll have a flexible line of credit instead of a fixed lump sum. 
• Collateral: Defaulting on a HELOC will result in foreclosure, whereas an auto loan lender will repossess the car if you default. 
• Interest: HELOCs offer the lowest interest rates on the market. They also have variable rates, which may result in fluctuating monthly payments.
• Repayment: You'll have a short interest-only window, 5 to 10 years. Then, you’ll be on the hook for principal-plus-interest over a 20-year period. 
• Fees: Closing expenses and appraisal fees can add thousands to the loan cost. 

Home equity investments

Although not a traditional loan, a home equity investment (HEI) allows you to tap into your equity for a single lump sum payout. Unlike home equity loans, HELOCs, and auto loans, HEIs don't require monthly payments. Instead, you share a portion of your home's appreciation anytime during a flexible 30-year term.

Auto loan vs. HEI key differences:

• Qualifying: HEIs have less stringent requirements. You can get approved with a credit score as low as 500, and income is not a factor.
• Collateral: HEIs are secured by the equity in your home.
• Repayment: There are no monthly payments and a 30-year term. Homeowners can pay back their investment when they sell, refinance, or use another source of funds.
• Fees: Like other equity products, HEIs come with closing costs, appraisal fees, and more.  

The pros and cons of using home equity to buy a car

Pros

• Lower interest rates: Home equity loans and HELOCs typically carry lower interest rates than car loans. This can reduce your overall borrowing cost—putting more money back in your pocket.
• Longer repayment periods: With equity financing, you can find repayment terms anywhere from 5 to 30 years. Longer terms offer lower monthly payments, helping free up more of your cash flow.
• More financial flexibility: Home equity tools can give you significantly larger payouts than an auto loan—especially if your credit profile isn't great. Not only can this expand your buying options, but it can also give you the flexibility to tackle other financial goals since there’s no restriction on how you can use the funds.   

Cons

• More thorough application: You can apply and get funded for a car loan in as little as one business day. With home equity products, you'll undergo a home appraisal and the underwriting process, which can take anywhere from 3 to 8 weeks.  
• More costly fees: Auto loans come with fixed origination fees, whereas HELOCs and home equity loans have appraisal fees, closing costs, and more. This can significantly bump borrowing costs, particularly if you want a smaller loan amount.
• Risk of foreclosure: Using your property as collateral means you risk losing your home if you default on payments. This is a much higher risk than losing the vehicle, which is the collateral with a car loan. 
• Car depreciation: Cars lose value quickly, so using home equity for a depreciating asset may not be the best financial decision.

Frequently asked questions

Is a home equity loan better than an auto loan?

It depends on your financial situation and needs. A home equity loan typically offers a lower interest rate than an auto loan, making it a more affordable loan option in terms of interest costs. However, using a home equity loan means putting your home at risk—if you default, you could face foreclosure. 

Auto loans, while having higher rates, are secured only by the vehicle, so the worst-case scenario is repossession of the car rather than losing your home. If you need a lower monthly payment and are confident in your ability to repay, a home equity loan can be the smarter move. Otherwise, an auto loan is the safer choice.

Can you use a HELOC to purchase a car?

Yes, you can use a HELOC to buy a car. However, given that your home is used as collateral, it comes with major risks. It's important to consider whether higher upfront costs and risk of foreclosure are worth lower interest rates and more flexible repayment terms. 

Is it a good idea to pay off a car with a HELOC?

Whether or not using a HELOC is a good financial move will depend on your short and long-term situation. Low interest rates and extended repayment terms are appealing. However, given the high fees involved, you'll want to borrow enough to offset the cost. It may be a strategic move if you plan to purchase a car and have other financial goals. If you're confident in managing the HELOC and paying off the balance quickly, it could save you money. However, for those just interested in financing a car, the car loan is the safer choice.

Final thoughts

Using home equity to buy a car can be a smart way to qualify for better terms and retain financial flexibility. However, since you risk losing a major asset—your home—it should be approached cautiously. 

For those with excellent credit and solid financial stability, a traditional car loan may be the safer choice. Alternatively, if securing a lower interest rate and spreading payments over a longer term is the priority, tapping into home equity makes sense. 

Before deciding, carefully evaluate your situation and compare all options.