Buying a car with a HELOC? Have a plan to pay it back
(This article originally appeared in NextMove, our weekly housing market newsletter. Register using the box below.)
Buying a car is already a nightmare in itself. There’s no need to risk your home on it.
That’s usually the advice we got from the experts when we asked if you should use a home loan or line of credit to buy a car instead of a car loan. But there are exceptions. Like the case of a financial planner who got big on a HELOC and borrowed wisely.
Meet Jon Reed from NextAdvisor. This story is a great example of how the risks of borrowing can be minimized if you have a solid plan to pay it back.
Jason Krueger had a ridiculously low introductory rate for a HELOC from his credit union – less than 1%. He knew he would be able to make his payments within a year and wouldn’t have to carry a balance for too long.
It was a better deal than getting a car loan, but not just because of the interest savings. By using the HELOC, he avoided the upselling and auto dealer finance office negotiations, which can be unnecessarily expensive and unnecessarily tedious.
In this case, using a HELOC for a non-domestic expense worked. But it’s easy to see why this strategy doesn’t always work, and why you need to be careful when incurring a big expense with secured debt.
First, the interest rate might not be as favorable for you. On average, auto loan interest rates are currently lower (in the range of 5-6%) than HELOCs and home equity loans (above 7%), according to Bankrate, which is owned by the same company than NextAdvisor.
Second, you may not have a plan to pay it off that quickly. Most people can’t pay off $27,000 in a year or two. And the longer this delay, the greater the risk that you will not be able to repay it, thus putting your house at risk.
Finally, while it’s nice to avoid the upsell at the dealership, you don’t always need to get financing from the dealership. You can shop for auto loans elsewhere, and you should.
If you’re looking for a car, don’t look to your house first. What if you’re not in the market for a car now, but might be in the future? Start saving now and you may be able to avoid the loan altogether.