Paying Off Car Loans with HELOCs: Dangers

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January 27, 2012

For those drivers who need help paying off auto loans promptly, one option can be HELOCs, or home equity lines of credit. In the world of car finance, a home-equity line of credit provides specific benefits for getting the best vehicle financing available. For that reason, financial experts may consider a HELOC or home-equity loan to be very beneficial for a borrower, especially in cases where negative credit could affect an unsecured auto loan. However, buyers using a HELOC should avoid these potential pitfalls in the financing experience.

  • Be mindful that your auto loan is tied to your home: When using a HELOC, your property is the asset used to secure your auto loan. That means that in the case of nonpayment, your home would be the first asset in the line of fire. Some borrowers do not fully understand that their properties would be vulnerable to aggressive collection processes by the lender.
  • Watch for variable interest rates: Although home-equity lines of credit often generally come with better interest rates than those that accompany unsecured auto loans, one thing to check on is how much variable interest rate HELOCs may vary based on market conditions. Some loans with variable interest rates end up costing buyers plenty when compounded interest grows due to changes in the US prime lending rate.
  • HELOCs can affect property sales: Although a home-equity line of credit may not specifically block the borrower from selling a property, it can have an effect on selling price. This is another thing to keep in mind if the property used for a HELOC is not one that you are staying invested in for the long term.
  • Check for annual fees: There may be additional fees associated with a HELOC including an annual fee. In any complex loan situation, it's a good idea to go over any specific charges with a representative of the lender.

For potential car buyers who pay attention to these basic tips, a HELOC can be the perfect tool for financing that new or used vehicle without being subject to extensive income eligibility requirements, or dealing with the issues involved in an unsecured auto loan where the lack of collateral creates bad situations for the borrower.

With the right safeguards in place, a borrower can profit from a home-equity line of credit or home-equity loan to back the purchase of an asset such as a vehicle. Researching these types of loans will show a buyer whether they can profit from a HELOC.

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