If you’re looking to buy a car, the traditional financing option is an auto loan, but it’s also possible to finance your vehicle with a home equity loan.
Using this approach, however, involves very different considerations than an auto loan. For starters, your house is collateral for a home equity loan, which can be a risky move if you fall behind on your payment. plus, there may be closing costs to pay.
Reading: Home equity loan to buy a car
But home equity loans have some benefits too. They typically offer more favorable interest rates than auto loans and more flexible repayment terms, with repayment terms of 10 to 15 years.
Here’s how to determine if using a home equity loan to buy a car is the best option for you.
Should I use my home equity to buy a car?
Buying a home equity car is a high-risk financing option that should be avoided if possible. While a traditional auto loan is secured by the car you buy, a home equity loan is secured by your home. That means the lender can foreclose on your home if you can’t afford a home equity loan.
Payment terms are also very different between the two types of loans. With a home equity loan, the payment term can be 10 to 15 years or more. the extended timeline means your monthly payments are likely to be much lower than they would be with an auto loan.
However, it is important to note that the true market value of a car depreciates at a rapid rate. According to Edmunds, a new car loses 23.5 percent of its value after about a year and 60 percent in the first five years.
If you buy a car with a home equity loan, which can offer payment terms of a decade or more, you’ll be paying for a vehicle that’s no longer worth the loan amount. a longer payment schedule will also mean you’re paying more interest overall on the purchase than you would with a shorter auto loan.
pros and cons of using a home equity loan to buy a car
Although a home equity loan is an option to purchase a car, there are several factors to consider before choosing this option. Here are some of the biggest benefits and drawbacks of buying a car with a home equity loan.
Most auto loans have a fixed term of three to seven years, but a home equity loan usually gives you a longer period to pay back, usually 10 to 15 years and sometimes longer. With a home equity loan, you can also pay off the loan early, which is not the case with many auto loans.
lower interest payments
Home equity loans generally have lower interest rates than auto loans, which may help if your budget is tight. If you have good credit, you may be able to find home equity loans with rates as low as 3 percent.
longer payment terms
The longer payment schedule of a home equity loan will lower your monthly payments, but the loan may also outlast your car. this could result in you still paying off your home equity loan on the old vehicle while financing a new vehicle.
decrease in home equity
Using your home equity to finance a car reduces the total amount of equity you have available in your home. this can be a problem if you need to sell your home before you have paid off the loan. That could turn your mortgage upside down if your home’s value declines to the point that you owe more on your mortgage and home equity loan than your home is worth.
Some home equity loans incur initial closing costs in addition to the interest you’ll pay over the life of the loan. This means that even if you get a lower interest rate than you would on an auto loan, a home equity loan could cost you more money.
risk of foreclosure
If you can’t keep up with your payments, the lender may sell your home to recover the debt you owe.
the end result
You can use your home equity to get a car loan, and you can get a better interest rate on your loan if you go that route. however, before moving forward, consider the risks of using your home as collateral and the drawbacks of choosing a longer-term loan. you may not want to be in debt any longer than you have to, especially for a car.
- Home Equity Loan Rates
- Current Auto Loan Rates
- 7 Reasons to Use Home Equity