A home equity line of credit (HELOC) is one of the most versatile personal loans on the market. The beauty of a HELOC is that you can put it into place and then use it for whatever you want.
That includes buying a car. It's called the HELOC auto loan. To see how this type of loan would suit your budget, test your situation using this free calculator.
Below are some of our most frequently asked questions about using a HELOC to finance a car.
Depending on your circumstances, using your HELOC to finance your car can be a great alternative to a traditional auto loan.
It allows you to control your monthly payment. And it can save you money on interest, taxes, and title registration. Plus it gives you the freedom to buy and sell vehicles more often than with traditional loans.
Our HELOC auto loan calculator is a great tool for figuring out your options. It allows you to compare, side by side, the auto loan and the HELOC.
It can show you how much you'll save in interest over the life of the loan, monthly payments for both loans, and tax savings with a HELOC.
A HELOC is secured by the equity in your home. Versus a normal car loan that's secured by the car. The benefits of having a HELOC in place can extend further than car loans.
A HELOC is less risky to the lender and it often has a lower rate than a car loan.
Car loans have strict repayment terms while a HELOC requires interest-only monthly payments. Meaning that you only owe the interest due every month.
This is compared to a car loan, which has a principal and interest payment. While this is good to pay off the loan quicker, it's also a much larger monthly payment.
With a HELOC, you can pay off your car over a longer period of time than you would with a normal car loan. You can also customize the repayment schedule to fit your income.
Car loans typically have a max term of seven years. The older the car, the shorter the term. So a 10-year-old vehicle might only be eligible for a three-year term. But since a HELOC isn't secured by the car, you can stretch a HELOC out as long as you need.
When you open up a HELOC, the loan generally stays in place for up to 10 years. That means you only need to do paperwork once.
But with a car loan, vehicle title work must be done every time you buy a car. By financing with a HELOC instead, you keep the title, lien free.
Because the car doesn't have a lien on it, you can use the equity in your car to get a loan down the road if you need.
Also, home mortgage interest has tax benefits that you don't get with a traditional auto loan.
It's important to remember that an interest-only payment on a HELOC does not pay the loan down. If you want to get your loan paid off, you'll need to make extra principal payments.
The good thing about the HELOC is that you can decide when and how much you make toward principal. Your bank can help you by setting up an automatic payment to include some principal and interest each month.
Since a HELOC is secured by your house, you run the risk of losing your home if you default on payments.
There are other things to be aware of with real estate loans. If you're in a flood zone, you may have to carry extra insurance. And a HELOC doesn't escrow for property tax and insurance the way a traditional mortgage would.
If you're concerned about the size of the monthly payment on a car loan, you may want to finance with a HELOC instead.
Especially when you're rebuilding credit and you already have a HELOC in place. This keeps credit pulls from affecting your credit score.
The lender pulls your credit every time you finance a new vehicle. With a HELOC, they pull your credit once and the loan is in place for the remaining term.
When interest rates are high, a HELOC makes more sense. Because the collateral is less risky, banks charge lower rates on HELOCs.
Additionally, you may want to use a HELOC if you plan to buy and sell cars often. This saves you money and the headache of having to do title work with every purchase.
The HELOC amount is determined by using a ratio called loan to value (LTV). But banks usually won't lend up to 100% LTV. The standard is 80%.
LTV is a way to figure out how leveraged your home is. Depending on the dollar amount, your bank might require an appraisal or outside evaluation to determine the value of your home first.
Let's say your home appraises for $100,000 and your mortgage is $60,000, then the LTV on your home is 60% (Loan/Value). Which means you have $40,000 in equity in your home.
In this example, that would give you a HELOC of $20,000.
$60,000 + $20,000 = $80,000 total debt
$80,000 / $100,000 = 80% LTV
Depending on your credit, your history with the bank, and the bank itself, they might lend up to a higher LTV. If the bank's policy allows for 95% LTV, then you'd be eligible for a $35,000 HELOC.
Yet the higher the LTV, the greater the risk to the bank. And greater risk means a higher interest rate. In that case, it's up to you to decide how high you want to go.
The timeframe depends on the bank. Some outside lenders do HELOCs too and you might have better luck going through a mortgage broker.
But if the dollar amount is small enough (say, under $100,000 and under 80% LTV), a bank can usually have you approved within a few business days.
The bank requires you to complete a consumer application. They pull your personal credit and calculate your debt to income ratio. They might want to see copies of your pay stub or tax returns.
If they are okay with the value of the home, then the paperwork can be done right away. This gives you access to the money as soon as the loan is signed.
But if the dollar amount is higher and/or LTV is high, they will require an appraisal. Those take can between 3-6 weeks, depending on your circumstances.
Our loan calculators are a great resource if you're looking for the best financing. They give you the information you need to make informed decisions about your finances.
If you have more questions about a HELOC auto loan, drop us a line using our contact form. These are just a few of the most common questions about HELOCs.