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Using A HELOC To Pay Off A Car

July 22, 2011 · 14 comments

in Personal Finance

A few years ago, we opened a Home Equity Line of Credit (HELOC) when we remodeled our home.  When we applied, the credit union warned us that they had not approved a HELOC for quite awhile since so few people had equity in their house.  Lo and behold, we did get approved.

Our remodeling was complete about 2.5 years ago, and we paid off the loan quickly.  However, we left the line of credit open just in case we ever needed the money, and the account was free to keep open.

This year though, we did use our line of credit again.  When I bought our new Ford Escape, I financed the car at the dealership so that I could get a discount being offered for financing.  Then yesterday, I paid off the car loan, using funds from my HELOC.

The Benefits of Using A HELOC To Pay Off Your Car

As of yesterday, my car is ‘paid off’, and I should be receiving my car title in the mail in the next month or so.  Even though I still owe the same amount of money, I will actually pay less over the life of the loan because:

  1. The interest rate is lower on my HELOC than what I was paying on my auto loan.
  2. I can deduct the interest paid on my HELOC on my Federal Income Taxes, which I could not do with the auto loan

Not only is it cheaper, but it is more convenient.  My HELOC is through the same credit union as my checking/saving accounts.  So, using electronic banking, I can easily move money between my checking account and HELOC.

A HELOC Is Not the Solution For Everyone

I have no worries about further ‘mortgaging’ my house with a HELOC because we have so much equity built up. Also, we don’t plan on moving for many years, so we don’t have to worry about needing to suddenly come up with the money to pay off the HELOC and the mortgage. (Although, even at today’s housing prices, we could easily handle the remaining owed on the mortgage plus the debt on the HELOC.)  Plus, we only use the HELOC for large purchases such as vehicles. We don’t use it as a resource for vacation or other discretionary expenses.  It has a very defined purpose, so there is never the temptation to use it for ‘extras’.

However, I do NOT recommend a HELOC for people in the following situations:

  1. Moving soon. You don’t want to have to pay the loan down in the near future, along with your mortgage.
  2. Overspenders. If you don’t have a tight control on your spending habits, then avoid a HELOC at all costs.  Overspenders may just view a HELOC as a giant pot of money that is just waiting to be spent.
  3. Heavy existing debt. For those that already owe a lot of money, a HELOC is probably not the answer for you.  (Unless you have some financial guidance and would use it to consolidate your debts.  HOWEVER, the credit cards that get paid off would need to be destroyed.)  Plus, it may be harder to get approved if you already have a lot of debt.

Overall for us, a HELOC has been a wonderful thing.  However, it is a variable rate loan.  (Our current loan is prime – .25%, with a floor of 4.25%)  I plan on paying this off fairly quickly though, so the variable aspect of the rate does not worry me.

Have you ever taken out a HELOC?  If so, what was your experience?

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{ 12 comments… read them below or add one }

101 Centavos July 22, 2011 at 7:25 am

As you said, it’s not for everyone. As long as you’re buying a hard asset, even a fast-depreciating one like a vehicle, it makes sense. Spending for vacations or other fluff expenses is a bad idea.

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Holly July 22, 2011 at 8:00 am

I used mine to fund a used car purchase last January and plan to have it paid off by December. Rate is 3.74%. Only thing I would caution against is that the bank can ‘call in’ the loan any time if they feel that you are a credit risk or that your property’s value has depreciated significantly (meaning you don’t have as much equity as when you originally applied for the HELOC).

This happened to a couple I met recently. Their house was purchased around $400,000 and now it’s appraised at about $265,000.

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Money Reasons July 22, 2011 at 9:25 am

I’ve never taken one out, but I always thought that it was a brilliant idea. Like you I also wanted one for an emergency purposes. I still might open one just for that purpose alone…

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Car Negotiation Coach July 22, 2011 at 10:17 am

Kris, this is a fantastic idea! since you’re prepared to pay off if the variable rate jumps up. If i had a HELOC i’d do the same thing!

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Nicole July 22, 2011 at 10:59 am

Nope! And I just looked at our credit union and car loan rates are lower than HELOC rates.

Some states have laws making it more difficult to do HELOCs, so maybe that’s why.

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MoneyCone July 22, 2011 at 12:04 pm

Great example of using credit responsibly, Kris!

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First Gen AMerican July 22, 2011 at 3:58 pm

We have always been a pay as you go family. If we didn’t have the money, it didn’t get remodeled. I think that’s why the kitchen took 10 years to do even though it was first on my list. Uh, oh, the furnace is leaking CO, time to tap the kitchen fund and get a furnace..Crap (literally), there’s roots growing through our sewer line…there goes the kitchen fund again. I guess I was glad I had a kitchen fund because I tapped it at least 5 times with unplanned expenses before we finally got around to using it for it’s actual purpose.

My credit union is offering like 2.99% financing on cars right now. I am surprised your home equity loan would beat those kinds of rates or maybe my bank just has really good deals.

In general I wouldn’t advocate doing what you just did unless it’s someone that has a good head on their shoulders like you. If you fall behind on your car payments, they take your car. If you fall behind on house payments, they take your house, so generally I don’t like using my house as collateral for non house purchases.

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krantcents July 22, 2011 at 4:59 pm

I have had a line of credit since 1985. About three years ago, I converted the unsecured line of credit to a HELOC because of the tax deduction and lower interest rate. I use this as a back up for emergencies.

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Little House July 22, 2011 at 7:54 pm

I think the way you’re using your HELOC is an excellent example of how to use one. Paying off a large expense at a really low interest rate is the way to go, especially since you plan on paying it off sooner than later and have very little debt to begin with. The points you made are very wise; only take one out if you have little debt and have a very definite plan!

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retirebyforty July 23, 2011 at 12:14 am

I used a HELOC to pay for a car about 5 years ago. It was great to have the tax deduction, but it was still debt. I was happy when we finished paying it off.

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Sandy @ Journey To Our Home August 10, 2011 at 7:21 pm

I believe that using a HELOC is definitely not for everyone. Though careful spenders can get away with it AND save money!
Great job!

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PaydayDesk October 1, 2012 at 4:10 am

Sometimes HELOC is really a good option, usually interest rates on this kind of loan are more than affordable. But I totally agree that HELOC isn’t a solution for every one. It’s risky enough because your house is a collateral, that’s why this loan needs an extra responsible attitude. I think that people who are tend to overspend do not have to use these loans. I’ve never considered taking out a HELOC, but if I will ever have a need to do that I’ll definitely think well and try to look for other options available for me before making a final decision.

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