If you have an outstanding car loan, you may be considering paying it off with a home equity line of credit (HELOC). Some people do this to consolidate debt, and they often even bundle in credit card debt this way. Let’s find out more about scenarios when paying off a car loan with a home equity loan may a good, or bad, idea.

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SCENARIO 1: You Want The Lowest Monthly Payment

If your goal is to get the lowest monthly payment possible, then a HELOC might be the ticket. Still, refinancing your current auto loan could also reduce your monthly payment significantly. The difference is that a HELOC typically requires a longer payment term, which means you pay more in interest. Also, many home equity loans carry an early repayment penalty.

One distinct advantage to HELOCs is that the interest may be tax deductible. You’ll have to crunch some numbers though, since the tax savings don’t always outweigh the higher interest payments.

SCENARIO 2: You Want The Lowest Overall Payment

If you want to pay as little as possible for a car, pay for it in full, in cash. Most people these days though turn to some kind of financing when buying a vehicle. In the case of HELOCs, the total amount you pay will probably be more than if you went with simple refinancing.

Another factor to consider is that HELOCs typically come with a variable interest rate. This means at any time you could see your monthly payments shoot up. If interest rates increase, your overall HELOC payment can also rise dramatically.

Other Factors To Consider

Remember, if for whatever reason you stop paying your loan, the bank can claim ownership on the collateral, that is, your home or car. If you want to minimize the risk of losing your home, a home equity loan shouldn’t be your first choice.

Also, if you think you might sell your home soon, a home equity loan isn’t a good idea. Taking out additional credit against your home could make the amount you owe greater than the sale price. This is called being “upside down” on your HELOC, and will make selling your house much more difficult.


No matter which strategy you choose, the good news is that there are several available options to lower your monthly car payment. Both HELOCs and auto refinancing have their merits. Make sure you take all the factors into consideration – monthly payment, overall cost, risk, etc. –  before you sign.

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