Home Equity Loan vs. Car Loan: Which Is the Better Deal?
Bills Bottom Line
A car loan and a home equity loan can both finance a vehicle, but they work very differently. Right now, car loan rates are often lower than home equity rates. And with a home equity loan, your home is on the line. Here’s how to choose.
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You have equity in your home. You need a car. And you've heard that borrowing against your house might get you a better rate than walking into a dealership.
That used to be true. For years, home equity loans offered lower rates than auto loans, and the math could work in your favor. But the gap has closed—and, in many cases, it’s completely flipped. A car loan may now be the cheaper option.
The right choice depends on your rate, your timeline, and how much risk you are comfortable with.
Home equity loan vs. car loan: key differences
Home equity loans and car loans have more in common than most people expect—both are secured debt, both carry interest, and both give you access to money you don’t have on hand. But that is roughly where the similarity ends. Here is how they actually compare:
| Home equity loan | HELOC | Car loan | |
|---|---|---|---|
| Collateral | Your home | Your home | Your vehicle |
| Rate type | Usually fixed | Usually variable | Usually fixed |
| Average rates | 6.73% (credit union), 7.37% (banks) | 7.54% (credit union), 8.00% (banks) | 6.56% (new), 11.40% (used) |
| Term length | 5 to 30 years | 5 to 30 years | 2 to 7 years |
| Closing costs | 2% to 5% in closing costs typical | 2% to 5% in closing costs typical | Dealer fees may apply |
| Risk if you default | Foreclosure of home | Foreclosure of home | Repossession of vehicle |
Rates above reflect the third quarter of 2025 using Experian and the National Credit Union Association data. Actual rates will vary, so check current rates from multiple lenders to see where they stand.
Even if rates are close, the actual risks are very different:
- A car loan is secured by the car. If you stop making payments, your vehicle is on the line.
- A home equity loan or HELOC is secured by your home. If you stop making payments, your home is on the line.
If something goes wrong with your payments, those are very different outcomes.
Are home equity loan rates really lower than car loan rates?
Home equity loans used to offer lower rates than auto loans. That has changed. The Federal Reserve’s rate hikes between 2022 and 2023 pushed borrowing costs up across the board, and home equity rates have not come back down as far as auto loan rates have.
As of Q3 2025, the average new car loan APR (annual percentage rate) was around 6.56%, according to Experian’s State of the Automotive Finance Market report. In comparison, the average home equity loan APR as of Q3 2025 was 6.73% from credit unions and 7.37% from banks.
Keep in mind that these are national averages—your credit profile, lender, and market conditions can all affect your actual rate. It’s also worth noting that many HELOCs carry variable rates, so your rate could rise over time if you go that route.
If you are buying used, the picture shifts. Used car loan rates tend to run significantly higher: around 11.4% in Q3 2025, according to Experian. That could make a home equity loan look more attractive. But the core risk does not change: your home is still on the line.
The real risk of using home equity to buy a car
The interest rate conversation matters. But it’s not the whole story.
With a car loan, the lender could repossess the car if you stop making payments. While that’s serious, missed payments on a home equity loan could result in losing your home.
Think about what that means in practice. You borrow against your house to buy a $35,000 vehicle. Two years later, your income drops. You fall behind on payments. Instead of just losing your car, you risk losing the house.
Depreciation often compounds the problem. Cars typically shed up to 30% of their value within the first two years, then 8%-12% a year after that, according to Kelley Blue Book. A home equity loan could run five to 30 years. With a long loan term, you could still be making payments on a car that’s worth almost nothing. Or one you’ve already sold.
Closing costs add another layer. Home equity loan closing costs generally run 2% to 5% of the loan amount. On a $30,000 loan, that could mean $600 to $1,500 in fees before your first payment. A car loan doesn’t usually come with that upfront cost.
When using home equity for a car might make sense
Most of the time, a car loan is the simpler and safer choice for buying a vehicle. But there could be situations where a home equity loan makes sense.
Consider a home equity loan if:
- You can qualify for a much lower rate than with an auto loan
- You plan to pay it off in 3 to 5 years rather than stretching it over a longer term
- You don't have a down payment for your car
- You're buying a vintage or collectible car that doesn't qualify for auto financing
If the numbers work out, it could be worth using your home equity for a vehicle purchase.
On the other hand, consider a car loan if:
- You don’t want to put your home at risk
- You have good credit and can get a competitive auto rate
- You want a faster, simpler process with no closing costs
- You’re buying new, where car loan rates are currently competitive with home equity rates
Ultimately, the best choice for you depends on your rate, your loan term, and how comfortable you are putting your home on the line. Run the numbers and go over your budget before deciding.
Bills Action Plan
- Pull your current home equity loan and HELOC rates from two or three lenders. Most offer free quotes without a hard credit pull. Use a home equity loan calculator to estimate monthly payments at different terms.
- Get preapproved for a car loan from your bank or credit union before visiting the dealership, so you have a real rate to compare against your home equity quotes. Also check dealer financing offers—some manufacturers offer promotional rates on new vehicles that could be lower than either option.
- Compare the two rates side by side, factoring in HEL closing costs (typically 2% to 5% of the loan amount). If the car loan rate is within one to two percentage points, the car loan is likely the safer choice.
Key Terms
Home equity loan: a fixed-rate loan secured by the equity in your home, repaid in regular installments over a set term.
HELOC: a home equity line of credit; a revolving line of credit secured by your home equity, typically with a variable rate. Unlike a home equity loan, a HELOC lets you draw funds, repay, then draw again as needed during a set period.
Collateral: the asset a lender can claim if you stop making payments. With a car loan, it’s the car. With a home equity loan, it’s your home.
APR: annual percentage rate; the true cost of borrowing expressed as a yearly rate, including interest and fees.
Depreciation: the decline in a vehicle’s market value over time.
Can I pay off a car loan with a home equity loan?
You can if you qualify, but think it through carefully. Paying off a car loan with a home equity loan shifts the collateral from your car to your home. That means a missed payment could put your home at risk, not just your car. In the current rate environment, car loans and home equity loans carry similar APRs for well-qualified borrowers, so the rate savings may be minimal. It could make sense in specific situations, but get rate quotes from both sides first before deciding.
Is HELOC interest deductible if I use it to buy a car?
For tax years 2018 and beyond, home equity loan and HELOC interest is only deductible if the funds were used to buy, build, or substantially improve the home securing the loan. Using the proceeds to buy a car doesn’t qualify for the deduction. The IRS is explicit on this point. Consult a tax advisor for guidance on your specific situation.
This article is for general education. Bills.com does not provide tax or financial advice. Consult a qualified professional for guidance specific to your situation.