Using Your Home Equity for a Car Loan

Discover the pros and cons of using a home equity loan to buy a car

When you're considering the purchase of a new or used car, you're probably looking into traditional auto loans. Another option to consider is using your home equity to buy a car. Since home equity loans and lines of credit generally have lower interest rates and give you the opportunity of possible tax deductions, they may be more affordable choices and allow you to consolidate your debt. Be sure to consult your tax advisor regarding deductibility of interest.

The benefits of purchasing a car with a home equity loan

Using your home equity loan to buy a car affords you several benefits you would not receive with an auto loan. You could also use your home equity for outstanding car payments in order to consolidate some of your debt. Consider the following benefits when making your decision.

  • Lower rates: Home equity loans usually have lower interest rates than auto loans, so you can end up with a lower monthly payment.
  • Bargaining power: Walking into a car dealership to purchase a car with a home equity loan means you're ready to buy. This may create some bargaining power to lower the price or other fees. When it comes to incentives, you'll also be able to opt for rebates from dealers instead of going for 0% financing since you already have financing.
  • Tax benefits: Unlike interest paid on a car loan, interest paid on a home equity loan may be tax-deductible. Be sure to talk to your tax advisor about deducting interest. Or, check with the IRS for specific eligibility requirements.
  • Consolidate debt: Even if you're not buying a new or used car, you could use your home equity loan to consolidate the debt on your current car. If the interest rate on a home equity loan is lower than the interest rate on your car loan, it would make sense to use your home equity to pay your car loan off.

The risks of buying a car with a home loan

While the lower interest rates and tax benefits of buying your car with a home loan are tempting, there are also some risks and expenses to take into account.

  • Putting your house as collateral: If you can't make the payments on your car loan, you could lose your car. However, if you default on your home equity loan, you could lose your home. Your home ownership is a powerful asset, but that also means it's a great risk to leverage it for something relatively small, like a new car purchase.
  • Still paying for car after you've sold or traded it in: Since a home equity loan repayment period can last between 10 and 30 years, you could end up paying for a car long after you've sold or traded it in. Typical car payments last three to six years, and though they have higher interest rates, the shorter time period could have you paying less in the long run.

Learn more about home equity loans to buy a car

If you have good credit and plan to pay off the loan in just a few years, then using a home equity loan to buy a car can be a good idea. While there are both risks and benefits to a home equity car loan, it's important to discuss your particular situation with a financial advisor. To learn more about home equity loans, interest and repayment options, talk to a Citizens Bank home loan originator at 1-888-333-1206 today. We can help you decide which product is right for you.