• Pros and Cons of Paying Off Auto Loans with HELOCs

    Generally speaking, the average American consumer is constantly paying off auto loans. For one reason or another, some people never experience the feeling of owning a lien-free car. Many people routinely purchase a new vehicle every 2 or 3 years, rolling over the existing loan balance into the new loan. Others choose an auto loan that spans many years, so when they finally pay the car off, it needs to be replaced again.

    If able, paying off an auto loan is an exciting achievement. It leaves consumers with a sense of pride and fulfillment that they accomplished something truly great. Various options exist for people looking to pay off an auto loan. Some choose to empty their savings account, while others take out a personal loan with a bank or credit union. Still others borrow money from close friends or family. For those who own a home and meet certain criteria, a home equity line of credit (HELOC) may be a viable option to consider.

    In order to qualify for a HELOC, lenders typically look for home owners with low debt-to-income ratios (the relationship between a consumer’s monthly income and monthly debt obligations), a stable employment history, and relative financial stability. As the name implies, home owners must also have a specific amount of equity in their home (generally 20% or greater). The following are a few of the advantages and disadvantages of using a HELOC to pay off an auto loan.

    Advantages

    • HELOCs are generally tax deductible– The interest paid on a mortgage loan is tax-deductible, while the interest paid on most other loans (including an auto loan) is not. Since HELOCs are a type of mortgage loan, all interest paid should be a deductible expense for taxpayers who itemize their deductions.
    • HELOCs generally offer more payment flexibility– A primary advantage to taking out a HELOC is the option that borrowers have to only pay interest on the borrowed amount. During times when money is lean, consumers can opt to delay payment of principal and only make interest payments.
    • HELOCs typically have lower interest rates – When compared to traditional auto loans, HELOCs generally provide borrowers with a lower interest rate. Lower interest rates equal lower payments, which may reduce what consumers pay on a monthly basis.
    • HELOCs generally offer term flexibility – Most auto financiers offers loan durations that can range anywhere from 1 to 7 years. HELOCs, on the other hand, generally have 10 or 15 year terms. Loans with longer durations have lower monthly payments.

    Disadvantages

    • HELOCs are debt – Consumers who pay off an auto loan by taking out a HELOC are essentially replacing one debt for another. While the car may be paid off from the perspective of the auto loan financier, the borrower maintains an equal level of debt. They’ve simply reorganized their debt into a different loan vehicle.
    • HELOCs have longer terms – As mentioned above, loans with longer terms have lower monthly payments. However, many people buy a new car every few years. It is possible the home owner will still be paying off the HELOC when a new car (and subsequent new car loan) is acquired.

    Consumers should weigh all advantages and disadvantages to make the best decision for their personal situation.