Using Home Equity to Buy a Car
Consider Using a HELOC When Buying Your Next CarA good case can be made that the flexibility and other inherent advantages of HELOC loans make them well-suited for financing automobile purchases. Here’s why:.
1. Interest Rate Advantages - The average interest rate on a HELOC is typically 1.5% - 2.0% less than the average 48-month new car loan. The spread between HELOCs and used car loans is even greater. Things to consider:
- first, take time to explore 0% or other special-financing deals that may be offered. Most often, when a choice is offered between 0% financing and a lump-sum cash discount, the buyer is better off taking the discount. However, each deal needs to be weighed on its own.
- second, interest on a HELOC is adjustable whereas the typical auto loan will carry a fixed interest rate. In a rising interest rate environment, the interest rate increases can - over time - eliminate the rate advantage of a HELOC. This is a risk you need to consider carefully.
- finally, interest paid on a HELOC loan is generally deductible on federal and state income taxes (consult your tax advisor). The benefit of this deduction varies depending on your marginal tax bracket. Here’s a table showing the effective interest rate for HELOC loans at different tax bracket levels.
2. Payment Flexibility I - The typical HELOC loan allows for interest-only payments. This can be a big flexibility advantage over the standard auto loan which requires fixed principal and interest payments. Of course, paying interest only will increase the total amount of interest you pay. We suggest that you pay your HELOC auto loan as if it were a standard auto loan and resort to the interest-only payment feature only in the event of true financial duress.
3. Payment Flexibility II - In addition to loan repayment flexibility, you also gain added flexibility when paying for the car. For instance, why not first put the car purchase on your credit card, earn significant cash back or other rewards and then pay-off the credit card with your HELOC?. This type of flexibility simply is not available with traditional auto financing methods. Here’s an article discussing benefits credit card auto purchases.
4. Title and Insurance - when you finance a car with a HELOC, title to the vehicle is in your name - not the bank or lender’s name. Auto lenders often require borrowers to maintain extra comprehensive insurance to ensure their risk is covered. When you purchase a car with a HELOC, you are in control of this and can determine what level of insurance is most cost-effective for your situation.
5. Price Negotiation - Finally, buying a car with a HELOC loan (or credit card/HELOC combination) puts you in a very favorable price negotiation position. From the dealer’s standpoint you are an attractive customer because you’re paying in cash. All discussion of dealer financing can be side-stepped and you can focus strictly on price matters.
The benefits of using a HELOC loan for a car purchase are clearly significant. However, these benefits must always be carefully weighed against the fact that your home is ultimately the collateral for the HELOC loan.
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