Paying Off a Car Loan with a HELOC: Pros and Cons

A car loan can be paid off using a home equity line of credit (HELOC). A HELOC, for those not familiar with the term (as it can seem obscure) is an amount of credit that a bank or other lender extends a homeowner, based on the equity in the home. Equity in a home is created by the amount paid into the home, plus any down payments and appreciation in the value of the home. A lender will permit a home owner to borrow against the equity through a HELOC in order to provide liquidity and access to cash for any purpose.

HELOCs as Debt

A HELOC is a loan, even though it is based on equity that the home has created. When a homeowner uses a HELOC, they must pay back the money borrowed in order to avoid lowering the value of the home or defaulting on the debt. If a default occurs, this may not necessarily result in repossession of a home, unless the amount borrowed exceeds the amount owed on the mortgage.

A homeowner may find benefits associated with using a HELOC to pay of a car loan. There are also disadvantages against using HELOCs for such as purpose. This article will look a limited number of pros and cons with regard to HELOCs to pay car loans.

The Pros of Using a HELOC

One advantage in using a HELOC is that it frees up cash that the homeowner has set aside. The HELOC takes advantage of the equity in the home and can be seen as a form of debt consolidation by a homeowner. Taking out a HELOC and using those proceeds to pay off a car loan eliminates 1 debt and consolidates it into the HELOC loan.

The Cons of Using a HELOC

A HELOC is debt. That means that using a HELOC to pay off a car loan is simply replacing 1 debt for another debt. It may also be possible that the interest rate for the HELOC is less favorable than the interest rate for the car loan. This would result in a higher monthly cost to a borrower.

A lender or other financial professional can assist a borrower in evaluating the advantages and disadvantages of a HELOC. Their expertise can help a borrower analyze the costs, terms and conditions of using a HELOC and whether such a move places the borrower in a better financial position by lowering their costs and eliminating their loan interest cost.

 


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