A home equity loan or line of credit (HELOC) can provide cash to cover large expenses, pay off debt, or handle a financial emergency. If you have a car loan, you might consider using your home equity loan or HELOC to pay it off. Doing so could help you eliminate a debt payment and save money on interest.
Can you use a HELOC to pay off auto loan debt? Yes. But is it the best use of a HELOC or home equity loan?
Before you can answer that question, consider all the pros and cons.
In this guide:
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 check
Certified or cashier’s check Money order Debit card ACH transfer/electronic bill payment |
Personal check
Debit card/credit card 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 pay off an auto loan
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
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Interest savingsUsing 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.
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Longer repayment termHome 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.
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Streamline billsIf 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.
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CostTaking 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.
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ReplacementUsing 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.
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Foreclosure riskHome 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
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Lower paymentsHELOCs 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.
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Lower closing costsClosing 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.
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No prepayment penaltiesIt’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.
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Variable ratesMany 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.
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Annual feesCertain 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.
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SecurityLike 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 off my car loan?
Whether you consider using a home equity loan or HELOC to pay off an auto loan can depend on your:
- Finances
- Other available options to eliminate the debt
- Cost of borrowing against your equity
Simple calculations can help you figure out the cost.
For example, say you have $20,000 left on your car loan at 9.99% APR. You have five years left of your original seven-year loan term. You qualify for a $20,000 home equity loan at 7.76%.
Here’s how your monthly payment and total interest paid compare, assuming you pay off the car and home equity loans within five years.
Note on the examples below: 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.
| Auto loan | Home equity loan | |
| Monthly payment | $425 | $403 |
| Interest paid | $5,491 | $4,194 |
| Verdict | Using a home equity loan to pay off an auto loan saves $1,297 in interest and reduces monthly payments by $22. |
As you can see, you can come out ahead using a home equity loan to pay off an auto loan. This assumes you pay off the home equity loan in 60 months. But what if you decide to repay the loan over six years instead?
In that case, your monthly payment drops to $348, a difference of $77 compared to your car loan. However, the total interest creeps up to $5,079. You’re still paying less interest than with the car loan, but now your total savings is much lower.
Doing the math with a HELOC looks different because you may need to make interest-only or no payments during the draw period.
But let’s assume you borrow $20,000 at 7.5%, with a $35 annual fee. Here’s how the math adds up, assuming a 60-month payoff goal.
| Auto loan | HELOC | |
| Monthly payment | $425 | $404 |
| Interest paid | $5,491 | $4,034 |
| Verdict | Using a HELOC to pay off an auto loan saves $1,457 in interest and reduces monthly payments by $21. |
This example assumes no additional charges to your HELOC and no prepayment penalty for repaying it early.
Since the rate is lower, your total interest savings is less than for a home equity loan. However, we also assumed your HELOC rate wouldn’t change during the 60 months you’re paying it off.
Suppose you’re debating whether to use a home equity loan or HELOC to pay off an auto loan. In that case, it’s essential to consider what you’ll pay, including:
- Interest rate
- Whether the rate is fixed or variable
- Closing costs
- Prepayment penalties
- Annual fees
If you’d prefer certainty about your monthly payments and total interest, a fixed-rate home equity loan might be the better option. Or you might consider a HELOC that allows you to convert from a variable rate to fixed after a certain time.
On the other hand, if rates remain low, you could save more with a variable-rate HELOC. Consider what’s happening with interest rates and which way they’re moving. The rate environment may bring additional rate hikes, which could make locking in a fixed rate on a home equity loan more appealing.
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 ask yourself important questions, including the following:
- What is my main goal? (Paying off the car loan, eliminating a payment, or saving on interest?)
- How much could I save using a home equity loan or HELOC to pay off a car loan?
- What are the upfront costs of a home equity loan or HELOC?
- What ongoing costs are involved with a home equity loan or HELOC?
- If I need to buy a new car in a few years, will having a car payment and a home equity loan or HELOC payment work for my budget?
- If I’m choosing a HELOC, how much of an increase in the rate can I afford if rates go up?
- How will using a home equity loan or HELOC to pay off an auto loan help or hurt my credit scores?
- Are there better options, such as a personal loan, to pay off auto loan debt?
If you’re satisfied your answers all point to a home equity loan or HELOC, the next step is finding the right lender. You might start by checking out home equity loan or HELOC rates at the bank where you have your mortgage or auto loan.
Getting a home equity loan or line of credit in the same place could save money if you qualify for a relationship rate discount. As an added benefit, keeping up with monthly payments may be easier if they’re going to the same lender. You can also cast the net wider to consider other lenders.
Finding the best home equity loans or the best HELOC rates comes down to understanding what lenders are looking for and what terms you’re likely to qualify for.
Factors lenders consider include:
- Credit scores
- Income
- How much equity you have in your home
As you consider lenders, look at the maximum loan-to-value (LTV) ratio they allow, minimum credit score requirements, and income requirements. Pay attention to the loan or HELOC terms, interest rates, and fees.
The more research you’re willing to do, the easier it may be to find your perfect home equity loan or HELOC match.
