You Probably Shouldn’t Buy a Car with a HELOC. Why This CFP Did It Anyway

An image of two people in front of an illustration of a car and a house. Courtesy of Jason Krueger
Jason Krueger and his family used a home equity loan to buy a car in 2019. That approach worked for them, but it might not work for every buyer.
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When Jason Krueger and his family were ready to buy a new car in 2019, they didn’t use the typical auto loan. They turned instead to a home equity line of credit

“We had a standing pre-approval to tap into the equity of our home,” says Krueger, a CFP and private wealth advisor at Ameriprise Financial. “We were able to transfer money from that line of credit into our checking account and use a cashier’s check from our credit union to pay for the vehicle in cash.” 

While auto loans are a popular way to finance a car purchase, they’re not the only approach. Homeowners can tap into their home equity to access funds, especially with today’s high home values. According to data provider Black Knight, the average U.S. homeowner has more than $200,000 in tappable equity in 2022. 

But even if homeowners can borrow against their equity to buy a car, that doesn’t necessarily mean they should — at least not without first thinking through the pros and cons. 

Why This Financial Planner Used a HELOC to Buy a Car

As a financial planner, Krueger knows a thing or two about money. He determined that using a HELOC to pay for his new Ford Edge would be more convenient and affordable than using a car loan. 

“I looked at our family’s expected cash flow and expenses and personally determined how quickly I would be able to pay the loan off,” Krueger says. “I concluded that I wouldn’t have the loan very long at all.”

At the time, Krueger’s credit union was offering an introductory interest rate on the HELOC of less than 1%, significantly lower than the rates on car loans in 2019. While this variable rate could eventually increase, Krueger knew he could pay off the $27,000 he borrowed in less than a year. 

Drawing on his standing HELOC also allowed Krueger and his family to avoid the high-pressure sales tactics of the finance managers at a car dealership. 

“A lot of dealerships make their money selling warranties and service contracts,” Krueger says. “By paying for the vehicle in cash, we were able to eliminate the often high-pressure finance manager’s office where they try to finance the vehicle themselves and also upsell warranties and service plans.”

With the cashier’s check they got from their credit union, Krueger and his family were able to make their purchase quickly and efficiently and leave with the vehicle’s title in hand. 

The Risks of Using Home Equity for Vehicle Debt

Because Krueger was able to pay off his HELOC quickly, he doesn’t have any regrets about using it to buy a car. However, he acknowledges that it may not be the best approach for every consumer, especially in today’s climate of rising interest rates. 

“It was a great short-term bridge, and the amount of interest was nominal,” Krueger says. “But for other families, a traditional vehicle loan with a fixed rate might be better. A car loan is a structured loan, it’s predictable, and you know what your monthly payments are going to be.” 

The Interest Rate Could Rise 

One risk of using a HELOC to pay for a car is that your variable interest rate could increase. Your monthly payments could go up, becoming burdensome and difficult to budget for. Since a home equity loan or HELOC is secured by your home, you also risk foreclosure if you can’t pay it back. 

“Life happens,” says Will Dunn, co-founder of Gravy, an app designed to help renters buy their first house. “If you can’t pay back your home equity loan or HELOC, you could lose your house, which is a really bad outcome that you don’t have in the case of specialized auto financing. If you can’t repay a car loan, your house isn’t on the chopping block.” 

You Might Tap Too Much Equity

If you’re planning on moving soon, it might also not make sense to borrow too much against your home’s equity, warns Carma Peters, president and CEO of Michigan Legacy Credit Union. 

“If you’re not planning on being in the home long-term, you probably don’t want to tie up your equity with an expensive car purchase,” Peters says. “The amount you will receive when you sell the home would be reduced, and you’ll have less to buy your next home.” 

A Car Is a Depreciating Asset 

Finally, it’s worth considering that a car’s value depreciates quickly, typically losing nearly 50% in the first five years. If you want to sell the car in the future, you might only recoup a fraction of the price you paid for the vehicle. 

Given the depreciating value of this asset, along with the danger of foreclosure if you fall behind on a home equity loan or HELOC, tapping into your equity to buy a car might not be worth the risk. 

“If you can save a whole bunch of money by using a home loan versus a purpose-built car loan, then it can make sense,” says Dunn. “But all else equal, I would steer clear of the home equity route in favor of purpose-built financing.”

Alternative Auto Financing Options 

When it comes to buying a car, you have a few options for covering your purchase that don’t involve tapping into your home’s equity.  

Car Loan 

One popular method of financing a car purchase is a vehicle loan. Car loans are installment loans that you pay off with monthly payments over a set term, typically anywhere from 24 to 84 months. 

A car loan is a type of secured loan that uses your vehicle as collateral. In many states, your lender will hold on to your car’s title until you’ve paid your loan back in full. If you don’t pay back your loan, the lender could seize your car as a form of repayment. 

You can find car loans from banks, credit unions and online lenders. Many dealerships also offer financing, which often work similarly to car loans from a bank. At the dealership, however, you might get pressured to purchase certain add-ons, such as a car warranty. 

Whether you borrow through a bank or dealership, it’s a good idea to shop around and compare your options so you can find a car loan with the lowest rates and fees. 

Personal Loan 

Using a personal loan is another option. Similar to a car loan, a personal loan is an installment loan with a fixed interest rate that you pay off monthly over time, usually somewhere between two and seven years. 

Banks, credit unions, and online lenders offer personal loans to qualifying consumers. Since most personal loans are unsecured, meaning they’re not backed by collateral, the credit and income requirements to borrow them can be lofty. 

Borrowers with the strongest credit tend to get the best rates. Many lenders let you prequalify for a personal loan online with no impact on your credit score. It could be worth checking your rates to see if a personal loan could be an affordable car financing strategy for you. 

Credit Card 

You may be able to charge at least some of the cost of your car to a credit card, depending on the seller’s rules and your credit limit. Using a credit card to buy a car can be risky, though, since credit cards tend to come with high APRs. 

You might consider opening a credit card with a 0% APR promotional period that spans 12 to 21 months. But if you can’t pay off your balance before the promotional period ends, you could be facing hefty interest charges on the remainder. 

Cash 

If you’ve been saving up for your car purchase, you could also consider purchasing it outright in cash. By buying the car in cash, you won’t have to deal with loan applications, credit checks, or monthly payments. 

Plus, you can get the vehicle title free and clear at the time of purchase. Many dealers will accept certified checks or cashier’s checks as payment. 

Note that you can also pay for part of the car in cash and use financing for the remaining cost. The bigger your down payment, the smaller loan amount you’ll have to borrow to pay off the rest of your car. 

Pro Tip

With rising interest rates, tapping into your home equity to buy a car might not be the most affordable approach. Compare all your financing options before you proceed. 

Other Uses for a HELOC or Home Equity Loan

While a home equity loan or HELOC doesn’t always make sense for a car purchase, there are some other expenses where it might be a better financing option. 

Home Renovations 

Tapping into home equity to renovate or remodel your home can be a savvy move. 

“Remodeling your home is a really common use for a home equity loan or HELOC,” Dunn says. “There are some tax benefits that come with tapping into home equity to renovate or remodel your home, and you also get the benefit of hopefully increasing your equity by making these repairs or remodels.”

When planning out the renovation, it can be a good idea to estimate how much value the project will add to your home if you choose to sell in the future. 

Debt Consolidation 

Using a home equity loan or HELOC to consolidate debt may also make sense if you’re juggling multiple loans with high interest rates. Lenders can often offer home equity products to consumers whose debt-to-income ratio is too high to qualify for other loan types, Peters says. 

“The longer term options with home equities can help our customers qualify for things like debt consolidation because they allow the monthly payments to fit into qualifying guidelines, even if they have too many debts or not enough income now to cover the monthly payments for a signature loan,” Peters says.

There are significant risks that come with consolidating debt with a home equity loan or HELOC, namely that moving unsecured debt like credit card debt to a loan secured by your home means if you can’t pay it back, you can lose your house. Experts say there are likely better options to paying off higher interest debt, and that any strategy’s success hinges on your ability to address the financial habits that go you into debt.

Medical Bills 

Covering medical bills may be another use for a home equity loan or HELOC, especially if these bills are emergency expenses that you can’t cover out of pocket. If you don’t have enough of a buffer in your savings account or left over discretionary income, drawing on your home equity could help you get through this difficult situation.