The most common way to buy a new car is with a car loan, of course. But auto loans are not the only financing game in town. If you're a homeowner, it might be tempting to tap into your equity to purchase those wheels, via a home equity loan or a HELOC, its credit line cousin.
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This approach, however, involves vastly different considerations than an auto loan. Here's how to determine whether using a home equity loan to buy a car is the best option for you.
Frankly, no. Avoid buying a car using home equity, if possible.
With a home equity loan, your home is the collateral for the debt. If you fall behind on repayment, the lender can foreclose on the home. Translation: You could lose it.
That goes for home equity lines of credit (HELOCs), too. Can you use a HELOC to buy a car? Sure. But should you? Probably not, and for the same reason: That line of credit uses your home as collateral, putting what's likely one of your biggest assets at risk.
Generally, it's best to tap your home equity if you're going to spend the funds on projects or expenses that further your financial or professional well-being, such as renovating your house or paying college tuition. Because cars don't hold their value well over time, it doesn't make sense to tie your home up with financing for one - you'd be repaying a loan on an item that won't be worth much when all is said and done. (In contrast, real estate generally appreciates over time, especially when money is spent to improve the property.)
Home equity loans and auto loans are both types of secured debt: that is, they are backed by something that acts as collateral for the loan. While a car loan is secured by the car you purchase, a home equity loan is secured by your home. In both cases, if you fail to repay, the lender has the right to seize, respectively, the car or the house.
However, the repayment terms are very different: You could have as long as 30 years to repay a home equity loan, versus the typical two to five years associated with an auto loan. Depending on how much you borrow with the home equity loan, this longer timeline could mean you have much lower monthly payments compared to the payments on a five-year car loan.
Remember, however: A car is a depreciating asset. By the time you're finished repaying a 15 or 20-year home equity loan or HELOC, your car won't be worth nearly as much as what you borrowed (and paid in interest) to get it. A new car loses 23.5 percent of its value after about one year and 60 percent in the first five years, according to Edmunds.
If you're hoping to save money on interest with a home equity loan, think again. While home equity loans did have lower interest rates compared to auto loans for some time, that trend has reversed. Now, many auto loan offers are lower or comparable to the rates on home equity products: As of June 2023, new car loan APRs were running two percentage points lower, on average, than home equity APRs.
In addition, you might need to pay closing costs for the home equity loan, which can run you anywhere from 2 percent to 5 percent of what you borrow - an expense you wouldn't be on the hook for with an auto loan.
There are more risks than rewards when it comes to getting a home equity loan for a car. That said, let's look at the pros and cons.
It's possible to use your home equity to take out a loan for a car, but it's a risky move. With the interest rates on home equity loans creeping up, it makes more sense to compare auto loan offers first.
Of course, this assumes you're taking out a home equity loan for the sole purpose of buying a car. If you plan to use only some of the funds to purchase a car and the rest for other, more investment-worthy aims - like, say, building a new garage to house those new wheels - it can still make sense to tap your equity. It all depends on your goals.
Additional reporting by Kacie Goff