Should you use a home equity loan to buy a car?

When auto loan rates look steep, it's tempting to look at other borrowing options — including the equity you've built in your home. After all, home equity loans typically have lower interest rates than auto loans, and you might be able to spread payments over a longer loan term. 

Before you put your home on the line for a new set of wheels, you need to understand exactly what you're signing up for. 

Below, we'll examine whether using a home equity loan to buy a car is a smart financial move or a risky shortcut. Weigh the potential benefits against the drawbacks that could impact your financial future.

Can you use a home equity loan to buy a car?

The short answer is yes. A home equity loan lets you borrow against the value you've built up in your property — in other words, your equity. More precisely, equity is the difference between what your home is worth and what you still owe on your mortgage. With a home equity loan, you get a lump sum of money upfront, which you pay back with fixed monthly payments over a set period (typically 5-30 years).

The funds from a home equity loan aren't restricted to home-related expenses. That cash is yours to use however you see fit, whether that's paying for college tuition, starting a major home renovation project, or buying a car. Lenders don't monitor how you spend the money once it's in your account, making it a flexible financing option for major purchases.

If you’re looking for a similar alternative, a home equity line of credit (HELOC) can also give you access to funds for a vehicle purchase. Instead of a lump sum payment, a home equity line of credit gives you a revolving credit line you can draw from as needed over a set period, most often 10 years. Using a home equity line of credit to buy a car can sometimes be a better option than a home equity loan because you only pay interest on the amount you actually use, not the entire approved credit limit.

Car loan vs. home equity loan

When you're deciding how to pay for a new car, it helps to see how home equity loans stack up against traditional auto loans. Here's a quick comparison:

The biggest differences come down to what's at stake and how long you'll be paying. When you buy a car with a home equity line of credit or a home equity loan, your house is the collateral, and you can stretch payments over decades. Auto loans use the car itself as security and typically max out at a few years. 

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

Like any big decision, weigh the potential benefits against the risks before signing on the dotted line.

Advantages of a home equity loan

Lower monthly payments

Home equity loans typically offer repayment terms up to 30 years, spreading your costs over a much longer loan term than traditional auto loans. This can reduce your monthly payments, leaving spare cash for other expenses or savings. A $30,000 vehicle financed for 6 years might cost $500 monthly with an auto loan, but the same amount could be just $200 monthly with a 20-year home equity loan.

A more attractive interest rate

This isn’t always the case, but some equity loans often come with lower interest rates than auto loans because they're secured by your home. If you have a decent credit score, you might qualify for rates below what you'd get with an auto loan, potentially saving thousands in interest in the long term.

Better makes accessing your home equity straightforward with a fast and easy online application that takes just minutes to complete. You can check your eligibility in as little as 3 minutes and potentially access between $50,000 and $500,000 of your home's value. With funds available in as little as 7 days, Better's home equity products offer a fast, fully online application process, all from the comfort of your couch.

...in as little as 3 minutes – no credit impact

Disadvantages of a home equity loan

Foreclosure risk

Missing payments on an auto loan can result in a car repossession, but falling behind on a home equity loan puts your house at risk of foreclosure. This seriously raises the stakes of your car purchase.

Borrowing long-term for a short-term asset

Cars typically lose 10% of their value in the first month alone, and it doesn't get any better from there. If you finance a car with a 15-year home equity loan, you could be making payments on a vehicle worth just a fraction of what you paid for it after a few years.

Equity depletion

Using home equity to buy a car reduces your ownership stake in what is likely your most valuable asset — your home. If property values decline after you take out the loan, you could end up underwater on your mortgage and owe more than your home is worth. This negative equity situation can make it difficult or impossible to sell your home without bringing cash to closing.

High closing costs

While auto loans typically have minimal upfront fees, home equity loans come with closing costs that often range from 2%-5% of the loan amount. On a $50,000 loan, that's $1,000-$2,500 in fees before you even get the money — a substantial premium to pay to finance a car.

Other Alternatives

For most car buyers, a traditional auto loan is the best alternative to a home equity loan. While rates may be higher, they don't put your house at risk. Here's how to get the best deal:

— Improve your credit score: If your score is low, work on improving it before applying. Even a small increase could lower your rate significantly, saving you thousands.

— Make a bigger down payment: Aim for a down payment of 20% or more to reduce your loan amount and qualify for better rates. You'll have smaller monthly payments and avoid getting underwater if you need to sell early.

— Shop around: Don't just take dealer financing. Get pre-qualified with multiple banks and credit unions to find the best rates without hurting your credit score. Then, use these offers to negotiate or just go with the best one.

Should I use home equity to buy a car?

The bottom line is that it's rarely a good idea to tap your home's equity for a depreciating asset like a car.

While the lower interest rates and monthly payments might be tempting at first, the downsides typically outweigh the benefits. For one, you put your home at risk to finance an asset that loses value the minute you drive it off the lot.

Add in the significant closing costs, the potential for negative equity if home values drop, and the fact that you could be paying for that car long after it's gone to the junkyard, and it's clear that a traditional auto loan is likely the smarter way to finance a car purchase.

Better options for your home equity needs

Using a home equity loan or a HELOC for a car purchase might not be a good idea, but if you're looking to make major home improvements, cover education expenses, or consolidate high-interest debt, they could be the perfect choice for your needs. 

Better makes applying for a loan or line of credit simple with a lightning-fast online application. In just 3 minutes, you can check your eligibility for up to $500,000 in home equity financing with funds in your account in as little as one week.

...in as little as 3 minutes – no credit impact