Home Equity Loan to Buy a Car: Is It a Smart Move?

Introduction to using a home equity loan to buy a car

Most of us base our financing decisions on the lowest interest rate. Based on that criterion alone, using a home equity loan to buy a car can sometimes sound like a good move. However, nowadays, auto loans frequently have lower rates than HE loans.

But there are other things to consider, too. And that’s especially true if your finances are — or might become — precarious. You could lose your home.

Almost as importantly, a home equity loan usually comes with relatively high closing costs. And, when it comes to your total cost of borrowing, those can make home equity loans expensive if you’re using one just to buy a car.

But there are still some circumstances in which using a home equity loan to buy a car can be a good idea. So, keep reading to see if those apply to you.

In this article (Skip to...)

• Should I use home equity to buy a car?
• Home equity loans vs auto loans
• Pros and cons of using home equity
• Alternative financing options
• Applying for a home equity loan

Should I use my home equity to buy a car?

The most important reason not to use a home equity loan to buy a car is that one of those loans is secured on your home. It’s a second mortgage, and the consequences of failing to keep up payments can be the same as with your first mortgage. Eventually, you could face foreclosure.

True, virtually all dealership and similar auto loans are also “secured” borrowing, meaning the lender can seize a particular asset if you default. But the asset for auto loans is the car. Would you rather discover that a repo person had taken back your car, or find a sheriff knocking on your front door to evict you?

Cars depreciate

Don’t forget that, unlike your home, your car will almost certainly lose value the longer you own it. In 2024, U.S. News reported that, from new, the average car depreciates 38.8% in the first five years.

But pick the wrong make and model, and things can be much worse. On average, a Maserati Quattroporte loses 64.5% of its value over those 60 months, which comes in at an eyewatering $90,588 loss. Do you still want to be paying that down with a home equity loan years after you sold the vehicle?

Classic cars can be an exception

There is an exception to the downsides of using a home equity loan to buy a car. And that’s when you want to buy a classic or collector’s car. These often increase in value while you own them.

True, recent sky-high inflation has robbed them of their reputation as glittering investments. But they still increased in value on average, which your new car almost certainly didn’t.

Meanwhile, it can be close to impossible to find a standard auto loan for an expensive classic vehicle. So, you may be forced to use an any-purpose loan such as an home equity loan or personal loan.

Differences between home equity loans and auto loans

Rates and closing costs

The other main consideration when deciding whether to use a home equity loan to buy a car is cost. Home equity loans typically come with closing costs. And, while some of these are usually tied to the amount you borrow, others, such as appraisals, are tied to the value of your home.

So, taking a home equity loan just to buy a car may be uneconomic. However, if you’re already applying for such a loan to fund home improvements, debt consolidation, or whatever else, adding some more to buy a car shouldn’t add all that much to your closing costs.

On the plus side, home equity loans might come with lower interest rates than auto loans. But that’s far from certain. At the end of May 2024, The Wall Street Journal found the average home equity loan rate was 8.61%. Meanwhile, AP says, “The average car loan interest rate as of the fourth quarter in 2023 was 7.18% for new cars and 11.93% for used cars.” Of course, dealerships and manufacturers often offer special deals on their loans, including sometimes 0% APRs. And those skew averages.

(Rates will almost certainly have changed by the time you read this. But those figures may give you a guide to the differences between the two.)

Naturally, someone with poor credit is likely to pay much higher rates on both types of loans than someone with a high score. But a home equity loan may come in cheaper if you have damaged credit.

Fixed vs. variable rates

As a general rule, home equity loans tend to come with fixed interest rates while auto loans come with variable ones. That may have caused real pain to auto-loan borrowers as the Federal Reserve hiked general interest rates to a 23-year high.

But, if most economists are right, interest rates have peaked and the fixed-rate advantage of home equity loans may have passed.

Terms and monthly payments

If you choose a longer term (the length of time the loan lasts), you can also get much lower monthly payments with a home equity loan. These can last up to 30 years if you want.

But beware. A longer loan term can make your total cost of borrowing higher, even with a lower interest rate. The only way you can be sure which type of loan (and we list other options below) is best for you is to get quotes from multiple lenders for each.

Then, compare them side by side. Your personal priorities (especially total value for money vs. low monthly outgoing) will guide you toward your best choice. Just look at your options holistically and weigh the benefits and risks of each carefully before making a decision.

Pros and cons of using a home equity loan to buy a car

Pros

1. Competitive interest rates compared to auto loans, especially for those with damaged credit
2. Fixed rates make budgeting a breeze
3. Choosing a longer term (up to 30 years) can make your monthly payments very low

Cons

1. You’re putting your home at risk if you don’t keep up payments
2. Only available to homeowners with adequate equity (Read Home Equity Loan Requirements for 2024)
3. Your dealership, bank, credit union, or online lender might offer you your lowest interest rate. Be sure to find out.
4. Fixed rates could mean you’ll miss out if general interest rates fall
5. Do you want to be still paying for a car in up to 30 years, possibly decades after the vehicle hits the scrap heap?
6. Home equity loans tend to have higher closing costs and lengthier and more demanding application processes than auto loans
7. If you find a home equity loan with zero closing costs, you’ll likely pay a higher interest rate

As a general rule, we wouldn’t recommend using a home equity loan just to finance a car. But the case for doing so becomes stronger if you’re already applying for a large HE loan or if your credit is damaged.

Alternative financing options

Cash-out refinance

Unless you can get a lower mortgage rate than the one you’re currently paying, this is a much worse idea than a home equity loan. You’ll replace your existing mortgage with an entirely new one. So, you’ll be paying the new current rate on a much larger loan amount.

Auto loan

An auto loan is perhaps the most obvious alternative when buying a car. Especially if your dealership is offering promotional interest rates, these can be less costly than auto loans.

Some banks, credit unions and online lenders also offer auto loans. And it’s a good idea to explore these before you visit your dealer’s forecourt. Once there, you may be pressured into signing with the dealer, who may be making a big profit on your loan.

Personal loan

Like a home equity loan, a personal loan can be used for any purpose. So buying a car with one can be great.

However, personal loan interest rates can vary enormously, depending on the lender and your credit score. So, shop around banks, credit unions and online lenders and get preapproved by the one offering the best deal. After that, see if your dealer will beat it.

Home equity line of credit (HELOC)

A HELOC is a home equity loan’s sibling. So, it’s another form of second mortgage.

But, instead of getting a lump sum, you are given a line of credit. And you can borrow, repay, and reborrow up to your limit as often as you want. And you pay interest only on your balance.

So, this could be great if you want a car now and plan to largely pay the loan off later with your annual bonus, tax refund or some other windfall.

HELOCs tend to have variable rates and much lower closing costs (sometimes zero) than a home equity loan. They also tend to have easier and faster application processes.

Applying for a home equity loan

Read How To Get A Home Equity Loan | Requirements 2024. But, briefly, you’ll need to:

• Be a homeowner
• Have plenty of equity in your home: Many lenders cap your secured borrowing (existing and new first and second mortgages) at 85% of your home’s value
• Have at least an OK credit score of often 620 or higher
• Not have too big an existing debt burden (unless you’re consolidating loans, too)
• Come up with a pile of paperwork similar to the one when you applied for your first mortgage
• Pay closing costs, typically 2%-6% of the amount you’re borrowing with your HE loan
• Shop around for your best deal. As with a mortgage, you should get multiple quotes because lenders can offer wildly less or more attractive rates and loan costs

Yes, it’s a lot. But it could be worth it if it’s what you need.

The bottom line for using a home equity loan to buy a car

A home equity loan could be your best way to finance your next car. But it usually won’t be.

You’re most likely to turn to a home equity loan if:

• Your credit’s damaged or
• You want to buy a classic car and
• You’re willing to put your home on the line or
• You’re already making an application for an HE loan and your car is an add-on
• You need your next car so badly that you’re willing to pay more in the long run to keep your monthly payments low

An auto loan may be a better bet in other circumstances. But be wary of dealers who pad interest rates to add to their profits. They can use high-pressure selling techniques.

Explore all your options — including personal loans from banks, credit unions and online lenders — by getting multiple quotes for different types of loans. And then choose the one that best meets your needs and priorities.