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Using a HELOC to Pay Off a Car Loan

Monday, November 7, 2011 1:25pm
Small toy car next to toy house
Car loans are usually given with a lifetime of three, five or seven years. There are exceptions, but consumers often find themselves being forced to conform to the standard of a loan lasting no more than seven years.

That short lifetime leads to high payments; but unlike houses, cars do not hold their value and instead lose their efficacy as collateral after just a few years. Car dealers and lenders know this, so they administer car loans with short lifetimes in an effort to collect on their money before the value of the car has deteriorated beyond the worth of the loan.

But for those looking to purchase a car and keep their payments down to a minimum, there is another route.

According to Steve Bucci, a debt advisor for Bankrate.com, a home equity line of credit (HELOC) can be used to pay off a car loan, and since HELOCs often have more than double the lifetime of traditional car loans, the monthly payment can be smaller than expected.

Ranging in the area of 10 to 15 years, a car buyer can obtain an expensive car and spread those payments out over a decade and a half, effectively bringing each monthly payment to a minimum.

Another plus for HELOCs is they can be paid off at anytime. In the event money flow is good, consumers can pay the line off, thus reducing the interest they owe whenever they have the finances and desire to do so.

However, since HELOCs are backed by the consumer’s home, it is especially important to be diligent and cautious about payments. The car does not serve as collateral, but instead the borrower’s house does.

This is significant also in the fact that a consumer probably does not want the loan to outlive their car. Fancy as a car may be, vehicles usually lose their luster by their 10- to 15-year mark. If a consumer buys a car using a HELOC, then decides to upgrade after five or six years, the last thing they want is to be continuing payment on the previous car in conjunction with the new one.

Finally, consider the home’s worth before taking out a HELOC for any purpose. If a home’s value declines and the home falls underwater after a HELOC has been taken out, the holder of the HELOC could end up in a lot of financial trouble.

As with all loans and large purchases, study the market before making a decision. HELOCs can be great tools for financing purchases—cars included—particularly in times of a healthy and growing real estate market. Keep in mind, however, they are not sources of free or never-ending money. They are tied to one of the largest purchases of your life and should be considered with a healthy amount of respect.

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