Can I use a home equity loan to buy a car?
A home equity loan is a way to borrow money against the value of your home. These loans are a type of consumer debt in which a lender (usually a bank or credit union) will lend you money at low interest rates in exchange for your offering your home as collateral. Home equity loans often have long repayment periods, similar to a mortgage, and are therefore sometimes referred to as second mortgages. Just like a first mortgage, your home is at risk if you fall behind on payments.
You can use money from a home loan to buy anything, including a car. Since these loans have low interest rates and low monthly repayments, it may seem like a bargain. However, it’s generally not a good idea to use a home equity loan to finance the purchase of a car. In this article, we tell you why.
Key points to remember
- Money from a home equity loan can be used for anything. Generally, it is not recommended to use it for the purchase of a car.
- Home equity loans can take decades to pay off, but cars quickly lose value. You would then be paying for your car long after its value had depreciated significantly.
- Try to improve the terms of a standard auto loan before using the equity in your home to purchase a vehicle.
Using a home equity loan to buy a car
Home equity loans can be a good way to borrow money for the long term. These loans often have low interest rates because they are secured loans: the bank does not take a lot of risk. After all, if borrowers can’t repay their loan, the bank can claim their house. They also have long repayment periods (sometimes decades) and, therefore, low monthly payments. You can use the money you receive from a home equity loan as you see fit. After all, it’s the money you’ve already paid on your mortgage.
This includes buying a car. At first glance, taking out a home loan to buy a car may seem like a good deal. You’re using money you’ve already paid on your mortgage, and home equity loans can have very low monthly payments compared to car loans. This is especially true if you don’t have great credit.
However, using a home loan to buy a car is normally a very bad idea. That’s because you’re taking money out of a fairly safe long-term investment (the equity in your home) and using it to buy a depreciating asset: a car. Cars begin to lose value the day they are purchased and will generally be worth much less after a decade.
If you use a home equity loan to buy a car, you may soon owe more on the loan than the car is worth. You may also be paying off the loan long after you sell the car. Although your monthly payments are very low, it also means that you will pay off the loan for a long period of time. Perhaps worst of all, however, is the fact that your home will be at risk throughout this time: if you fall behind on your loan repayments, the bank may seize you and you could lose your home.
New cars can lose about 60% of their value in five years. Home equity loans usually have much longer repayment terms than this. Therefore, if you use a home equity loan to buy a car, you could be paying off the loan for years after your car has lost value.
Although using a home equity loan to buy a car is normally a bad idea, for some people it might be the only viable way to buy a vehicle. This is especially true if your credit score is not excellent, as in this case the terms offered to you on standard car loans can be very expensive. However, the downsides of using a home loan to finance a car purchase are such that it’s worth trying to make a regular car loan more affordable before turning to equity. of your house.
There are several ways to get a better deal on a car loan:
- Improve your credit score. The auto loan rates offered to you depend a lot on your credit score. If you have a credit score below 740 (which is considered “good”), spend a few months working on your credit score before applying for a car loan. This could make a big difference in the terms you are offered.
- Increase your down payment. Lenders will give you a better deal if you are able to put some extra money down at the start of your loan term. A larger down payment also means you’ll borrow less, further reducing your monthly costs.
- Get pre-qualified. Talk to lenders before deciding on a car, so you can understand how much you can afford to spend. Having financing secured up front also provides greater bargaining power with car dealerships and could help you get a better deal.
Even after working through these tips, a car loan may still be too expensive for you. In this case, it is possible to use the equity in your home to buy a car, but you should consider this as a last resort.
Can I use a home equity loan to buy a car?
Yes. A home equity loan can be used however you see fit. But it’s generally considered best used for a home improvement project and not for a rapidly depreciating asset like a car.
Why should I use a home equity loan to buy a car?
Home equity loans usually have low interest rates and low monthly payments. This can make them seem much cheaper than an auto loan. This is especially true if you don’t have good credit, as this can make car loans very expensive.
Should I use a home equity loan to buy a car?
Generally, this is a bad idea. Cars lose their value fairly quickly, while your home is likely to increase in value. Home equity loans have long repayment terms, which means you could be paying off your loan longer than you have the car you bought it with, and you could end up paying a lot more in the long run.
You can use money from a home equity loan to buy anything you want, after all, it’s your money. However, it’s generally not a good idea to use it to buy a car. That’s because home loans can take decades to pay off, but cars quickly lose value. This can mean you’ll be paying for your car long after it’s lost all of its value. It’s best to try to improve the terms of a standard auto loan before considering using the equity in your home to purchase a vehicle.