Pay Off Car Loan With HELOC?

by Dual Income No Kids on May 21, 2009 · 0 comments

Hi All,

So I got a ride home with a friend the other day. Since he knew that I’m a bit of a finance buff, we started talking about his car loan – and ways to pay it off quickly.

Well, one way to pay off a car loan is by transferring it to a Home Equity Line of Credit (HELOC). There are some advantages and disadvantages of doing this.

1) HELOCs are cheaper. Right now the average national rate on a HELOC is 5.74%, where as the average rate on a 48 month car loan is 7.95%. So, all things being equal, you’d save about 2% on your interest costs at current rates.

2) HELOCs have a bit more flexibility. Car loans usually have terms of three to seven years. On the other hand, HELOCs allow you to pay back the terms of the loan over 10 to 15 years. This means that you’d have more flexibility with your payments if you went with a HELOC.

3) HELOCs are tax deductible. If you itemize on your taxes, you can deduct the interest you pay on the HELOC. On the other hand, car loans generally are not deductible. Of course, this is only going to help if you itemize. If you take the standard deduction, then it won’t matter.

Some downsides:

1) Debt. Taking on more debt is always a problem. Its depressing and it cuts into your cash flow. Generally speaking it probably makes the most sense to aggressively pay off the expensive car debt rather than applying for a HELOC to refinance it, even if the HELOC is less expensive and more flexible.

2) Decreased home equity. Real estate prices are declining, and adding the car loan to your line of credit can decrease the amount of equity available in your home. This could be a problem if you need to sell your house unexpectedly. You could become “underwater” on your mortgage if the home value decreases to the point that you owe more on your first mortgage and your HELOC than your property is worth.

Live frugally and build wealth is the best ways to pay down debt! Happy debt reduction!

Best,

James

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