Skip links
A mortgage agent talking to her clients

How to buy a car using home equity loans

Using home equity loans to buy a car

Getting a car is always an exciting purchase, whether it’s your first one, replacing an old car, or adding to your collection. While people know they can use a traditional car loan from a bank, most don’t realize that they can use a home equity loan to buy a car. Knowing the options available to you is as important as knowing how each option works and if it’s the right fit for you and your financial situation.  

A mortgage agent speaking to clients

Different methods to buy a car 

Financial institutions offer multiple ways for you to buy a vehicle. Even if you don’t want to completely own the car and just have a vehicle for your own convenience, you have some options available to you as well. Through traditional auto financing, leasing, lease-to-own, or home equity loans, you could buy the car that you prefer.

Home equity loans

You can tap into your home equity and access it as a lump sum. If you’re a homeowner, home equity loans are a good source of financing because interest rates tend to be lower, and the eligibility criteria are less stringent. Usually, home equity loans depend more on how much equity you have built rather than your credit score or income. You can calculate how much equity you have by subtracting your outstanding mortgage balance from the house’s appraised value.  

Home equity loans provide many financial opportunities especially to those who don’t meet loan requirements from traditional banks.

Traditional car financing

The most common way to buy a car is by financing it with a loan from major financial institutions or the vehicle manufacturer’s financing program. Regular car loans can last anywhere from three to seven years. If your credit score isn’t perceived as the strongest, you can provide a down payment at the beginning of the term as well.

Like most loans from the bank, you’ll need to prove your creditworthiness by providing a strong credit score and steady income. The car dealership will offer an interest rate based on the market environment, your creditworthiness, and other promotions they may include. 

Leasing a car

If you don’t think you’ll need the car for an extended period, you could choose to lease it instead. To lease a car is similar to renting a car, but instead of making a prepayment at the start of your rental, you make monthly payments to the dealership for the benefit of using the vehicle for the lease term.

Those monthly payments can include interest, tax, and depreciation costs, but overall, these payments can be less than the payments for car financing.  Leasing provides more flexibility than financing a car purchase because you can return the vehicle at the end of the lease term or pay out the outstanding balance and purchase the vehicle.  

Generally, you’ll be expected to provide a down payment before you can start using the car. Remember that leasing a car comes with limits such as a yearly mileage limit and penalty fees for any damage on the car. However, leasing is a good option if you know you’re not staying in a place for the long term. If you do change your mind and want to keep your car, the dealership may be willing to arrange that with you.  

Lease-to-own financing 

An alternative to standard car loans and leasing is lease-to-own agreements. Many people choose lease-to-own because they get the benefits of what leasing and financing give them. It’s a good way for someone to eventually secure a vehicle until they’re more financially secure.  

While lease-to-own agreements allow people to eventually own the car they are driving, it’s important to treat the car like it’s a rental. Until the contract ends and you have officially purchased the car, you’ll have certain driving limits and other obligations according to your dealership.

What to consider before choosing a home equity loan

Home equity loans are wonderful financing options because they provide flexibility in the way that they are used. Even with this freedom, it’s important to examine your own financial status if you do decide that a home equity loan is the best way to pay for your new vehicle.

Home equity loans allow homeowners to make purchases without having to verify their credit score. However, confirm that you will be able to repay the loan without adding stress on your current income.

The length of time it takes to repay a home equity loan could be significantly more than it takes to repay a traditional car loan. If you happen to sell your car or replace it, you would still be obligated to the home equity loan.

Be sure to compare interest rates and extra fees between the different ways to buy a car. While home equity loans can reach significant amounts, it’s best to borrow only what you need.

A mortgage agent giving her clients house keys.

Conclusion: using home equity loans to purchase a car 

How you decide to buy a car will be entirely up to you but be sure to make an informed decision by considering all options.   

If you find that a home equity loan is the best option for you and your financial goals, contact a Financial Solutions Specialist at Alpine Credits. They are experts on home equity loans, and they’ll be happy to discuss what home equity loans can do for you. 

Frequently asked questions

The exact total of the loan depends on how much your lender is willing to provide and how much home equity you have built. Generally, you can borrow enough to cover the cost of a car. 

If you find yourself in the position to be able to completely repay your home equity loan before the term official ends, be sure to review the contract. Some lenders set penalties for early payments, but there are some that do not.