Should You Use Home Equity to Purchase or Pay Off Your Car?

Can you use home equity to pay off or purchase a car? Yes, home equity loans and HELOCs can be used for that purpose. But should you?

That depends. While tapping into home equity can lower interest rates or consolidate debt, it may come with risks, including putting your home on the line. The decision hinges on your financial goals, current debt, and ability to manage the new loan responsibly. Below, we break down the pros, cons, and key factors to help you decide if this strategy aligns with your financial situation.

Can I use a home equity loan or HELOC to pay off a car loan?

Home equity loans and HELOCs allow you to tap into your home equity in different ways. You’re borrowing a lump sum with a home equity loan, often at a fixed interest rate. Conversely, a HELOC is a revolving credit line that often comes with a variable rate. 

You can use a HELOC or home equity loan to pay off auto loan balances. The way to do this depends on how you access your equity.

If you have a home equity loan, payment options may include:	If you have a HELOC, payment options may include:
Personal, certified, or cashier’s check or debit card	Personal check
Money order	Debit card/credit card
ACH transfer/electronic bill payment	ACH transfer

When you get the home equity loan proceeds, your lender might deposit the money into your checking account. In that case, you’d be able to spend the money the same way as any other deposit. So you’d have the option to use your home equity loan to pay off an auto loan. 

A HELOC is a revolving credit line separate from your bank account. Like a home equity loan, you can use a HELOC for any expense, including paying off a car note. Your lender might give you paper checks for withdrawals or a linked debit card to make purchases. 

Could you withdraw funds from a home equity loan or HELOC in cash to pay off a car loan? It’s possible—but your auto lender might not accept cash payments. Writing a check or scheduling an electronic payment can be a safer way to pay off an auto loan with your home equity. 

Pros and cons of using a home equity loan or HELOC to purchase or pay off a car

You can use a home equity loan or HELOC to pay off a car loan, but first, consider whether this makes financial sense. We’ve researched the advantages and disadvantages of using your equity to pay off auto loan debt. 

Pros and cons of a home equity loan

Pros

• Interest savings

  Using a home equity loan to pay off a car loan might save money if you can borrow at a lower interest rate. Comparing the rate on your auto loan against the rate you’d qualify for with a HELOC can help you decide whether it makes sense.

• Longer repayment term

  Home equity loan terms can range from five to 30 years. The longer the term, the lower the monthly payment. If high car loan payments are straining your budget, you might use a home equity loan to pay off an auto loan. 

• Streamline bills

  If you already have a home equity loan, you could use the money to pay off your auto loan and eliminate a monthly debt payment, freeing up money to fund other financial goals. 

Cons

• Cost

  Taking out a home equity loan may mean paying closing costs. At 2% to 5% of the loan amount, these can add to your overall cost and detract from savings. The total interest you’d pay over the life of the loan might exceed the amount you’d pay if you stuck with your original auto loan payment schedule. 

• Replacement

  Using your home equity loan to pay off your auto loan may not yield many benefits if you need to replace the car in a few years. You could make payments to a home equity loan and another vehicle loan if you need to finance the purchase.

• Foreclosure risk

  Home equity loans are secured by your equity, meaning you risk losing your home if you fall behind on payments. If you take out a home equity loan just to pay off a car loan, consider the consequences if you can’t keep up with debt repayment. 

Pros and cons of a HELOC

Pros

• Lower payments

  HELOCs may allow you to make interest-only payments during the draw period, which often lasts 10 years. These interest payments could be much lower than your regular car payment, freeing up money in your budget. 

• Lower closing costs

  Closing costs for a HELOC may be lower than a home equity loan, which could make it a more attractive option. Comparing closing costs, rates, and fees for HELOCs and home equity loans with different lenders can give you a better idea of what you’ll pay.

• No prepayment penalties

  It’s possible to pay off a HELOC early after using it to pay off an auto loan. That could happen if you aggressively pay down your credit line during the draw period. Certain HELOC lenders allow you to pay off a HELOC early without tacking on a prepayment penalty. 

Cons

• Variable rates

  Many HELOCs have variable interest rates, meaning the rate (and your payment) could increase or decrease over time. If you’re using a HELOC to pay off auto loan debt, you risk paying more interest if the rate rises. You could avoid that with a HELOC that offers the option to convert to a fixed rate. 

• Annual fees

  Certain HELOC lenders charge an annual or monthly maintenance fee for having a HELOC. Even if the fee is small, it can add up over time and increase the cost of using your HELOC to pay off an auto loan.

• Security

  Like a home equity loan, your home secures your HELOC. If you experience financial hardship and can’t pay on the HELOC, you risk losing the home to foreclosure. 

Should I use a home equity loan or HELOC to pay for my car or car loan?

Deciding whether to use a home equity loan, HELOC, or stick with your auto loan depends on several factors. Carefully weighing these will help you make a choice that aligns with your financial goals and minimizes risks.

• Your finances: Assess your current debt, income stability, and emergency savings. If your finances are tight or unpredictable, adding home equity debt could strain your budget or put your home at risk. If you’re financially stable, home equity products might help you reduce interest costs or improve cash flow.
• Other available options: Explore alternatives like refinancing your auto loan, using a personal loan, or adjusting your budget. These can sometimes eliminate debt without the risks or costs associated with borrowing against your home. Home equity loans or HELOCs make sense only if they clearly save you money or meet your financial needs better than other options.
• The cost of borrowing: Compare the interest rates, fees, and total interest paid for each option. A lower rate may save money, but variable rates on HELOCs could increase over time. Don’t overlook closing costs and fees, which can eat into your savings. If the total cost of borrowing exceeds your car loan’s cost, it’s not a smart move.

By evaluating how these factors impact your monthly budget, long-term financial security, and overall costs, you can make a confident decision that aligns with your goals.

Here are some examples that show if and when this strategy makes financial sense.

When a home equity loan makes sense

Suppose you owe $20,000 on your car loan at 9.99% APR with five years remaining. You qualify for a home equity loan at 7.76% APR for five years. Here’s how the monthly payment and total interest compare:

Loan type	Monthly payment	Total interest paid
Auto loan	$425	$5,491
Home equity loan	$403	$4,194

🧑‍⚖️ Verdict: Using a home equity loan saves $1,297 in interest and reduces your monthly payment by $22. If your goal is to save money while locking in predictable payments, a home equity loan makes sense in this scenario.

Even extending the repayment term slightly—for instance, six years instead of five—can lower your monthly payment further, though total interest costs will increase slightly.

When a HELOC makes sense

Now, let’s say you’re struggling with monthly cash flow. You owe $15,000 on your auto loan at 8% APR with four years left, and you qualify for a HELOC with a variable rate starting at 7% APR. During the draw period, you can make interest-only payments.

Loan type	Monthly payment
Auto loan	$366
HELOC (interest-only)	$88

🧑‍⚖️ Verdict: A HELOC drastically reduces your monthly payment, freeing up cash for other priorities. However, this strategy only works if you’re disciplined about paying off the balance quickly once your finances stabilize.

Keep in mind that with a HELOC, your payments may increase if interest rates rise, and continuing to make only interest payments can lead to higher long-term costs.

When sticking with an auto loan makes sense

Say you owe $10,000 on your car loan at 5.5% APR with three years left. You’re considering a HELOC at 7.5% APR or a home equity loan at 8% APR. Here’s how the costs compare:

Loan type	Monthly payment	Total interest paid
Auto loan	$303	$864
HELOC	$311	$1,192
Home equity loan	$314	$1,327

🧑‍⚖️ Verdict: Neither the HELOC nor the home equity loan saves you money here. The auto loan has the lowest interest rate, the lowest total cost, and the most predictable payments. Sticking with your auto loan is the better financial choice.

Note on the examples: We used an online calculator to determine these numbers for illustration. The amortization schedule and payment may not be identical to what we show for the original auto loans assuming you’ve already paid in for several years.

Next steps to use a HELOC or home equity loan to pay off your auto loan

Before moving ahead with a home equity loan or HELOC to pay off auto loan debt, it’s helpful to do the following:

1. Determine your goals. Do you want to pay off your car? Eliminate a payment? Save on interest?
2. Research and calculate the costs associated with a home equity loan or HELOC. Factor in both upfront and ongoing expenses, like fees and interest.
3. Compare those costs to any potential savings.
4. Consider your future finances. Can you afford a higher monthly payment if your interest rate increases? What if you need to buy a new car before you’ve repaid your home equity loan or HELOC?
5. Weigh the alternatives. Are there better options, such as a personal loan, to pay off auto debt?

You also need to consider whether using a home equity loan or HELOC to pay off an auto loan will help or hurt your credit score. If you’re sure a home equity loan or HELOC is the right move, your next step is finding the right lender.

---

Tip

Check out home equity loan and HELOC rates at the bank where you have your mortgage or auto loan, and see if you qualify for a relationship discount.

---

Securing the best home equity loans or the best HELOC rates comes down to your credit, income, and home equity. It also involves a bit of comparison shopping between lenders before you accept a loan or line of credit.

The more research you’re willing to do—and the better you prepare your finances—the easier it may be to find your perfect home equity loan or HELOC match.