How to Use a Home Equity Loan for an Auto Purchase

For some people, using a home equity loan rather than a car loan can save money on buying a car. The advantages to using a home equity loan for your car purchase are a potentially lower interest rate, since your home is likely better collateral than a vehicle that could rapidly depreciate, and some or all of the interest may be tax deductible. The tax code lets you write off the interest on up to $100,000 -- or $50,000 per spouse if you're married filing separately -- of debt secured by your home, including home equity loans, regardless of what you use the loan proceeds for. However, the danger in using your home as collateral is that if you default on the loan, the lender can take your home.

Step 1

Apply for a home equity loan. Typically, you will want to apply to multiple lenders to find the best rate. As long as you apply within a short period of time -- between 14 and 45 days depending on the credit score formula being used -- all the home equity loan inquiries will count as just one for credit scoring purposes.

Step 2

Use the proceeds of the home equity loan to pay for your car. Once you have the money from the home equity loan, it is yours to use as you wish.

Step 3

Repay the home equity loan as scheduled. If you don't repay the loan on time, the lender can take your home because you used it as collateral.

Step 4

Deduct the interest on your taxes each year, assuming you itemize. The interest is reported to you by your lender on Form 1098 and goes on line 10 of Schedule A. After being combined with your other itemized deductions, it reduces your taxable income.

Tip

  • When comparing the interest rates on auto loans versus home equity loans, include the closing costs. According to the Lending Tree website, home equity loans may have higher closing costs that could make it more costly than a car loan, even with a lower interest rate.

Photo Credits

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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