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

If you’ve taken a home loan and have been repaying it for a few years, it’s likely you would have built up equity in your home. This means that you can use the home equity as collateral to finance other purchases like a new car. A home equity loan may seem like an attractive option; however, it may be a good idea to consider a car loan as well. 

The benefits of using a home equity loan

The primary reason why many homeowners choose a home equity loan to fund a new car is the convenience. If you choose this option, you don’t have to search for a lender or brokers to find an attractive deal on a car loan. Additionally, there are no additional credit checks or financial status checks, which make it quicker. In some cases, the repayment schedule remains the same as the original loan.

When you choose a home equity loan for a car purchase, your interest may also be lower than that of a car loan. Finally, if you opt to buy a car with a home equity loan, you’ll only need to make one monthly payment, instead of paying off multiple loans at the same time.

How does a car loan compare?

When you take out a car loan, lenders fund the purchase of your car by paying you a lump sum amount. The loan has to be repaid over a fixed time period via monthly instalments. The car is used as collateral to safeguard the lender.

You can choose from different types of car loans, such as secured or unsecured. You can also use car loans to buy new or used vehicles. The borrowed amount is usually repaid in monthly instalments over the loan duration ranging between five and ten years. You can also choose between a fixed and a variable rate of interest.

Should I buy a car with a home equity loan?

While a home equity loan can be convenient and may have a lower rate of interest, there are other factors you may want to consider before you make your choice. Lenders may charge a redraw fee when you use your home’s equity to borrow additional money. These fees should be taken into account while choosing between car loan and home equity. Car loan fees are generally charged upfront and calculated as a component of the overall rate of interest.The duration of a home equity loan is longer than a car loan and could be up to 30 years.

As you can’t separate the amount used to buy a car using the home equity, you’ll pay the interest over the entire tenure. This means you may end up paying higher interest over the long-term when you buy a car with a home equity loan. Even if the car loan interest rate is more than the mortgage rate, the shorter duration reduces the total interest payout.

Further, if there is no equity in your home, the lender may not allow you to redraw the mortgage. Ultimately, it comes down to what works for you, but it’s always worth comparing both options and calculating the potential costs of each over the long term. 

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