Buy a Car On Your Terms: Use a HELOC
Not only can you use your home equity to pay off a car loan, but you could use it to buy the car in the first place.
Maybe you would rather skip the lengthy loan process after choosing the car. Maybe you’d rather write a check and drive your new car home.
Or perhaps you’re getting a great deal from a private party or buying a classic car that can’t be financed with a regular auto loan.
Whatever the reason, a home equity line of credit, or HELOC, is a viable source of auto financing. But is it a good idea?
Should You Use a HELOC Instead of an Auto Loan?
Using a HELOC to buy a car lets you do it on your own terms. You don't have to use whatever financing the dealer happens to offer.
But if you use a HELOC, know the rules before you do. A HELOC “acts” differently than a car loan in the following ways.
Variable rate: Car loan rates are fixed, whereas HELOCs are tied to the fluctuating prime rate. Your “car payment” could rise after you buy.
Higher rates: A HELOC may come with a higher rate than a car loan depending on the current prime rate (8.5% at the time of this writing) and auto financing deals offered by the dealer.
Interest-only payments: You are only required to pay interest on a HELOC. So making the minimum payment does not reduce the principal. You have to be intentional about paying off the loan.
Longer loan term: HELOCs come with a 10-year draw period and 20-year repayment. That’s a long time to have a car loan if you don’t pay it off sooner.
Pay off and re-borrow: You can pay off the balance and use the HELOC to buy another car or use for a different purpose within the 10-year draw period.
Your home is the collateral: If you don’t pay a car loan, someone repossesses the car. But HELOC non-repayment could mean you lose your home.
Before You Look at Cars
A HELOC is not as easy to get as a car loan. You can’t get one in an hour.
Apply for your HELOC a few weeks before you plan to look for vehicles. It could take that long for the lender to process paperwork and verify your financials. You may also need a home appraisal, but many HELOC lenders today can verify your home’s value without one.
When your HELOC closes, the lender may give you a checkbook and/or instructions on how to transfer HELOC funds into your checking account.
Make sure you know how to access funds before you go car shopping.
How to Use HELOC Funds at the Dealership
You might ask the dealer (before you decide on a car) if they take personal checks. If so, you can write a check tied to your HELOC account. The lender should issue that when you receive the HELOC.
A HELOC check looks no different from a personal check.
If the dealer doesn’t accept checks, you have to plan ahead. Transfer the right amount from your HELOC to a checking account. Then, bring a cashier’s check or other payment method accepted by the dealer.
Either way, the fact that you’re using a HELOC is undetectable by the dealer.
The Invisible “Cash Penalty” When Buying From a Dealer
Kelly Blue Book estimates that a dealership may raise the price of a car by $1,000 or more if it is not issuing the loan.
It makes money from the loan origination.
So if you tell the salesperson you’re paying cash upfront, you may get a worse deal.
Instead, don’t mention you’ll be paying cash. If asked, say you’re undecided until you know the final price (which is always true; your HELOC may not cover the full price and fees).
The dealer will assume you’ll finance. It’s almost a given with today’s car prices.
Once you have your car price negotiated in writing, then reveal that you’ll simply be writing a check.
Making Your HELOC More Like an Auto Loan
If variable rates keep you up at night, you can make your HELOC more like a car loan by locking in the rate.
There are two ways to do this.
1. Home Equity Loan
You can get a home equity loan instead of a HELOC. This is a closed-end second mortgage with a fixed rate and payment. Get a lump sum upfront and pay it off over the loan term, just like an auto loan.
Keep in mind that you can’t pull more money out later. Once you get your loan, you would have to replace it with a HELOC or another home equity loan to pull out more money.
2. Lock In Your HELOC
Many lenders allow you to lock in a portion of the HELOC.
For example, you are approved for a $50,000 credit line but need only $30,000 for the car. You draw $30,000 and lock in that portion with a fixed rate and payment. You leave $20,000 undrawn and available for other purposes.
This strategy gives you the predictability of a regular loan with some of the flexibility of a HELOC.
Check with your HELOC lender to see if this option is available before you apply.
Using a HELOC Has Its Advantages
You should have the most control possible when buying a car. That means knowing your exact financing terms before you ever walk into a dealership.
Plus, you can use your HELOC for more than just the car loan. Catch up on home repairs, pay off credit card debt, and get ahead financially.
See what you qualify for by speaking to a reputable HELOC lender today.
