HELOC to Finance New Car?

Interesting… so while contemplating on how I should finance my new car, I started to do research on the best method. Originally my 2 options were:

  • Sell stock and buy the car outright
  • Make a small down payment and finance the car at $400-600/mo for 60 months (at ~6.6% interest rate)

However, I’ve been looking at HELOC (home equity line of credit) and it’s looking more and more like the correct action to take. One thing that does have me a bit worried is that HELOCs are variable rate, but according to MarketWatch, the current HELOC interest rate is around 3.25% (is it me or is that exceptionally low?). I’ll need to discuss this further with my dad and Derek as they know a lot more about HELOCs than I do.

Even if the interest goes up to 7%, there’s a huge benefit in using HELOC to finance my car and that’s because the interest is tax deductible. According to BankRate.com:

When you refinance acquisition debt or take out additional debt such as a HELOC, you can deduct the interest on such debt if you use it to improve your residence and on up to an additional $100,000 that you can use for any purpose, except for the purchase of tax-exempt securities such as municipal bonds. If you use the $100,000 to buy a second home, then it gets thrown back into the $1 million pot.

Maybe when I bring this up with my dad and Derek, they’ll knock me on my head and call me stupid for thinking up such a stupid scheme. But so far, it feels like a sound plan. I wonder if I have enough money in my house yet to cover the whole purchase.

2 Replies to “HELOC to Finance New Car?”

  1. Once you’ve decided that it’s reasonable to borrow money to finance a vehicle, which is a separate question :), using a HELOC is not a bad option. There are two things to consider though:

    * Your home is now collateral. If you default, they take your home. With the auto loan, they take your car. This is Suze Orman’s argument against it.

    * Difficulty getting the HELOC. Lenders are a lot tighter since the days when HELOCs were used to do 0% down home purchases. As you said, appraisal value and outstanding loans will determine the size of the HELOC you can get.

    Also, if you want to hedge a bit, use a combination. For example, use a downpayment + HELOC. Consider that if you finance 100% of the vehicle cost, you’re upside down on the loan at day zero since you can’t sell it for the loan value.

  2. You need to compare the cost of the HELOC to the return that you will get out of the money. In this case, you should compare the cost of the HELOC to the return that you get out of the stock, considering all possibilities. If you are okay with all of them, then go for it. Make sure to increase the value of the HELOC by the rate of your tax bracket. I’m not sure if you are supposed to use your marginal tax bracket or average tax burden (these are often wildly different numbers) but you get the idea.

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