Can I use a home equity loan to buy a new car?

My bank has a great rate (about 2%) on home equity loans right now. I also need a new car. Can I use the home equity loan to purchase a car—is this a good idea?

Answer
Theoretically, using a home equity loan instead of a car loan to purchase a vehicle seems like a no-brainer. Your interest rate is lower and your car isn’t held as collateral.
However, whatever you’re using the money to buy, a home equity loan uses your house as collateral. If you were to default on the loan, lenders could come after your home rather than your car, which is a much bigger risk.
Home equity loans also come with the following financial consequences:
  • Closing costs
  • Longer repayment terms than most car loans
  • A decrease in your home equity
If you can pay the loan off quickly and have a nest egg to fall back on, taking out a home equity loan may work for you, but it’s not recommended to everyone.
Since you’re going to have a house and new car to your name, have you considered bundling your home and auto insurance policies? Jerry can help you compare competitive quotes from up to 50 top insurance providers to find you hundreds of dollars in annual insurance savings.
Eric Schad
Answered on Oct 29, 2021
Eric Schad has been a freelance writer for nearly a decade, as well as an SEO specialist and editor for the past five years. Before getting behind the keyboard, he worked in the finance and music industries (the perfect combo). With a wide array of professional and personal experiences, he’s developed a knack for tone and branding across many different verticals. Away from the computer, Schad is a blues guitar shredder, crazed sports fan, and always down for a spontaneous trip anywhere around the globe.
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