Should You Pay off Loans for Cars with HELOCs?

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November 9, 2016

Learn about the 6 benefits to paying off a car loan early with a home equity line of credit, and how to look for the best HELOC terms available.

There's a lot of talk these days about using various financial instruments for paying off loans on cars. One of these items is referred to as a "home equity line of credit", or HELOC. A HELOC is a kind of home equity loan where the borrower uses their how home as collateral in order to get credit.

The Benefits of Paying Off Car Loans with HELOCs

For homeowners who are thinking about the best tools for paying off car loans, HELOCs, or home equity lines of credit, can be good options. HELOCs offer a number of benefits to a potential borrower, and attention to these tips can help you get the best loan for driving that new or used vehicle off of the dealer's lot.

  • A HELOC is secured with collateral. Because the home-equity line of credit uses a home or property as collateral for the auto loan, lenders are less nervous about granting these types of loans and can offer lower interest rates, as well as fewer requirements for good credit or income situations. Buyers taking out unsecured loans can find these requirements quite costly.
  • A HELOC often allows for more flexibility in payment terms. Many times, paying off a HELOC early will incur no penalties. This is great for a buyer who wants to pay the loan off early to avoid more interest.
  • A HELOC often does not carry additional costs. Items like closing costs, check-fee costs and other additional charges are not usually attached to a HELOC. Look critically at loans that include these items, and tell lenders that you can find better deals elsewhere, rather than settling for a home-equity line of credit that includes a bunch of additional charges.
  • Some HELOCs can be transferred to a fixed-rate product. Although home-equity lines of credit often include a variable interest rate, which financial experts warn consumers to stay away from, the truth is that in many cases this variable interest rate can be dealt with, either by transferring to a fixed-rate, or with additional controls to limit the raising of the interest rate on the loan.
  • Some HELOCs have caps and controls on the variable interest rate. Caps and other limitations can assure that a variable interest rate will not spiral out of control due to its ties to the US prime lending rate. In many cases, interest rates tied to the US prime rate are not relatively high, and any increase is often offset by the fact that the borrower received low interest rates at the outset by using this type of secured auto loan.
  • Some HELOCs may include tax-deductible interest. Although many kinds of personal loans are not tax-deductible, a home-equity line of credit may fall into the category of a mortgage payment that includes tax-deductible interest on Federal income tax statements. Be sure to check with your accountant about any tax-deductible status for these types of loans.

Bad Credit Okay for HELOCs

If you have equity built up in your home it may not be difficult to obtain a HELOC. Your credit will be looked at, but the bank is really looking at the equity and loaning you money based on that. So it is possible to get a home equity line with bad credit. As a general rule you may not be able to borrow against the entire amount of equity built in your home. Having bad credit will also increase the interest rate, so weigh this against the interest rate you are paying on your car to decide if it's worth it.

Putting Your House Up

One of the biggest issues with using a HELOC for an auto loan is the idea that a borrower is essentially putting a house up as collateral. If your issue with financing an auto loan is that a car can be repossessed without prompt payment, throwing your home into the mix is often a bad idea. It's important for borrowers to know that in the event of nonpayment, the house would be the first asset to go. This is a common reason why many bars do not choose to go with a HELOC for financing an auto loan.

Possible Downsides of Loans with Variable Rates

Another issue with the HELOC is that these types of loans often rely on variable interest rates. Though you can often change to a fixed rate, you ought to know what can happen if it has a variable rate. A variable interest rate means that the interest rate on the loan is tied to the US prime rate, which is a common suite used by banking institutions to determine what is an optimal or ideal lending rate. What this means in terms of a home equity line is that if interest rates change, the borrower may have to pay higher rates on his or her loan. first-time home buyers are often cautioned against variable or adjustable rates, and in this case, it is also good to look at any fixed rate possibilities for a HELOC.

Make Sure Paying off Loans with a HELOC Works for You

A HELOC can also be a bad idea if you need to sell your home unexpectedly. The basic question that a borrower should ask is whether he or she wants to, in effect, "mix assets", and tie the value of the automobile to the value of the home. Whether or not a HELOC makes sense is a case-by-case situation, but in the event that a home-equity loan turns out to be an undesirable way to finance the car, other options can make a consumer's financial life easier. Options for alternative financing include scraping together more for an upfront payment, leasing a vehicle instead of buying, or putting together a short term loan based on good credit where a borrower or can often enjoy a low interest rate. Before using a HELOC, think about the pros and cons, and don't sink into a home equity loan situation unaware of the consequences.

Will Paying Off Your Car Loan Increase Your Credit Score?

Paying off your car loan can affect your credit score. Building and increasing credit is something that is easy to do if you always pay your bills on time and pay off your debts accordingly. Depending on the car loan that you take out, it can affect your credit score, for the better. A car title loan, or a secured loan, is when you put your car up as collateral for the loan. Since you are using an asset to secure the loan, technically, you are not adding any debt to yourself.

Because of this, paying off a car title loan really won't affect your credit score. It may help it go up a few points, but nothing major. If you get a regular, personal auto loan where it is unsecured and you are paying interest, then you can definitely increase your credit score. Taking out a loan will decrease your credit score because you are adding a liability to your record. However, paying off this loan by paying the monthly payments, and then ultimately paying the loan off on time, or even early, will help your credit score. Actually, it isn't out of the realm to take out a loan that you know you can pay back, just to improve your credit. People often do this to raise their credit score quickly and it is quite effective. It is essential for you to pay your loan back on time not only to save yourself from more interest, but also to increase your credit score.

Research for Paying off Car Loans with HELOC

To review, here are some things to look into when taking out your HELOC.

  • Fixed or variable interest rates. A HELOC will generally come with variable interest rates which can change according to the US prime lending rate. You'll want to determine whether there are caps or limitations on the variable interest rate, or whether you can convert your HELOC to a fixed interest rate, to know exactly what you will be paying back over time.
  • How the debt will affect your home. In any HELOC, the property is ultimately the collateral used to secure the loan, and in the case of nonpayment, is on the firing line for seizure or other action by the lender. Ask about specific policies, as some lenders are more aggressive than others.
  • Calculating daily interest. Interest on a HELOC is often calculated daily rather than monthly. Take a look and see how this will affect the compounding of your interest and your monthly payments on the auto loan.
  • Renewals. At the time that the HELOC is due, there may be the option of a loan renewal, but this varies according to the lender, so it's another thing to check out before signing.
  • Fees. Unlike other types of loans, especially auto loans, HELOCs do not generally include prepayment penalties, although this is also something to talk to the lender about. HELOC borrowers should also be able to avoid extra charges for checking, or for "closing costs" at the time the loan is due.

These are just a few of the issues that a borrower taking out a HELOC will want to discuss with a lender before securing an auto loan using a home, which is often the most valuable asset in household. The HELOC is a long term relationship between the lender and the borrower, and taking time to go over details before signing will pay off in the long run as both parties navigate the deal from start to finish.

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