Buying a Car with a HELOC? Have a Plan to Pay It Off

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(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)

Buying a car is enough of a nightmare by itself. There’s no need to risk your house on it.

That’s generally the advice we heard from experts when we asked if you should use a home equity loan or line of credit to buy a car instead of an auto loan. But there are exceptions. Like the case of a financial planner who got a great deal on a HELOC and borrowed wisely.

This is Jon Reed with NextAdvisor. This story is a great example of how the risks that come with borrowing can be minimized if you have a solid plan to pay it off.

Jason Krueger had a ridiculously low introductory rate for a HELOC from his credit union – less than 1%. He knew he would be able to make his payments within a year, and wouldn’t have to carry a balance for too long.

It was a better deal than getting an auto loan – but not just because of saving on interest. By using the HELOC, he avoided the upselling and negotiations of the car dealership finance office, which can be needlessly expensive, and needlessly annoying. 

In this case, using a HELOC for a non-home expense worked out. But it’s easy to see why that strategy might not always work, and why you should be careful when taking on a big expense with secured debt.

First, the interest rate might not be as favorable for you. On average, interest rates for car loans right now are lower (in the 5-6% range) than those for HELOCs and home equity loans (above 7%), according to Bankrate, which is owned by the same company as NextAdvisor.

Second, you may not have a plan to pay it back that quickly. Most people can’t pay off $27,000 in a year or two. And the longer that timeline gets, the more risk there is that you won’t be able to pay it off, thereby jeopardizing your home.

Finally, while avoiding the upselling at the dealership is nice, you don’t always have to get financing from the dealer. You can shop around for auto loans elsewhere, and you should. 

If you’re in the market for a car, don’t turn to your house first. And if you’re not in the market for a car now, but might be in the future? Start saving now, and maybe you can avoid the loan altogether.