Can I use a home equity loan to buy a car? Imagine you’re in the market for a new car, eager to upgrade your ride or replace your aging vehicle. As you explore financing options, you might wonder if tapping into the equity of your home could be a viable solution.
After all, home equity loans offer relatively low-interest rates and favorable terms compared to other forms of borrowing. But is using a home equity loan to finance a car purchase a smart financial move?
In this article, we’ll delve into the pros and cons of leveraging your home equity to buy a car, exploring the potential benefits and risks involved in this unconventional approach to auto financing.
What Is A Home Equity Loan?
A home equity loan allows homeowners to borrow money by leveraging the equity in their home as collateral. Equity represents the disparity between the present market value of the home and the outstanding mortgage balance.
Home equity loans allow homeowners to access a lump sum of money, which they repay over time with fixed monthly payments.
These loans have lower interest rates compared to other forms of borrowing because they are secured by the value of the home. It is also referred to as a second mortgage.
How Can I Use My Home Equity Loan To Buy A Car?
Using a home equity loan to buy a car involves leveraging the equity in your home as collateral to borrow money. After determining your home’s equity and applying for the loan, you receive the funds, which can be used to purchase the vehicle.
Repayment occurs through fixed monthly installments over a specified period, with the risk of potential home foreclosure if payments are not met.
While this approach offers potentially lower interest rates, it’s important to weigh the risks against the benefits and ensure affordability before proceeding.
Pros and Cons
As mentioned earlier, there are advantages to using a home equity loan for a car purchase. But while there are sweet sides, there are also drawbacks, and risks involved.
However, in this section of this article, we will be exploring some of the pros and cons of using a home equity loan for a car purchase. They include:
Pros:
- Flexibility.
- Lower payments.
- Longer terms.
- Convenient repayment terms.
- Competitive interest rates.
- Stronger negotiating power.
Cons:
- Troublesome application process.
- Closing costs.
- Foreclosure risks.
- Decreased equity.
- No financial profit.
- It is a poor investment.
- Depreciation costs added.
- Long-term cost.
- Possibility of losing equity.
- Difficulty selling your home.
- Higher interest rates.
- Urge and desire to spend more.
- Risk of losing your home.
- The higher the repayment term, the higher the interest rates.
Should I Use My Home Equity Loan To Buy A Car?
While home equity loans can be useful for long-term financing needs, they’re generally not recommended for buying a car. Despite their appeal due to their low interest rates and secure nature, financial advisors often discourage this practice.
In addition, using home equity to finance a depreciating asset like a car requires careful consideration. Instead, improving your credit score and exploring alternative auto loan options is advisable to avoid putting your home at risk as collateral.
Home Equity Loan Vs. Car Loan
What is the difference between a home equity loan and a car loan? While these loan types have distinct differences and some similarities, let’s explore the comparison between them:
| Home Equity Loans | Car or Auto Loans | |
| Collateral required | Home | Car |
| Payment type | Monthly payments | Monthly payments |
| Minimum credit score | 620 | Any credit score below 660 will have higher interest rates. |
| Average repayment term | 5 to 30 years | About 6 years |
| Rate type | Fixed or variable | Normally fixed |
| Lender’s fees | 2% to 5% in closing costs | 0% to 2% in origination fees |
Major differences between these loan types include:
- Repayment terms.
- Fees.
- Type of collateral.
- Interest rates.
Similarities between loan types:
- Fixed rates.
- Installment payments.
The above are some common similarities and differences between home equity and car loans.
How To Use A Home Equity Loan to Buy a Car
If you still want to use your home equity loan to buy a car, we’ll guide you through the necessary steps. While it’s not generally recommended as the optimal strategy, it can serve as a last resort if needed. So, here’s how to go about it:
- Pay Attention to the Numbers.
- Look Around.
- Apply.
- Receive the Funds.
Pay Attention To The Numbers
Before utilizing a home equity loan to purchase a car, it’s essential to calculate your monthly loan payment to ensure affordability.
Also, determine the amount you qualify for, as lenders assess this using a metric called the loan-to-value ratio, which determines your borrowing eligibility based on the equity in your home.
Look Around
The next step is to search for a lender that offers a suitable home equity loan for your needs. Consider checking with credit unions and banks where you have existing accounts, but also explore multiple lenders to compare options.
Apply
Once you’ve found a suitable lender, proceed with the application process. Ensure that all the information you provide is accurate and up-to-date. You’ll need details regarding your credit history, income, and other financial aspects for the application.
Receive The Funds
The funding time varies depending on the lender, but after submitting your application, it undergoes a review process before approval. In some cases, funding can occur within a week of application submission.
Once you have gotten the funds, you can now go ahead and purchase the car you want.
