How to Lower Your Car Payment Using a Home Equity Loan

The Tax Deduction No Longer Applies

Important Update: Prior to 2018, home equity loan interest was tax-deductible regardless of how you used the funds. Many car buyers took advantage of this to effectively lower their borrowing costs.

This is no longer the case. The Tax Cuts and Jobs Act of 2017 changed the rules. Now, home equity loan interest is only deductible if the funds are used to "buy, build, or substantially improve" the home that secures the loan. Using a home equity loan for a car purchase does not qualify for this deduction.

Bottom line: If anyone tells you that home equity interest is tax-deductible for car purchases, they're giving you outdated information.

Other Disadvantages to Consider

Your home is at risk: If you can't make payments on the loan, not only is your vehicle at risk, but so is your home since you put it up as collateral. This is a serious consideration.

Longer terms mean more interest: Home equity loans often have longer repayment terms than auto loans. If you stretch out your car payments over 10 years or more, you're going to end up paying significantly more in interest than if you had taken out a regular car loan.

Discipline required: If you don't have the discipline to pay more than the minimum payment, you'll end up underwater on a depreciating asset for years.

When It Might Still Make Sense

Even without the tax benefit, a home equity loan might still work in certain situations:

• If you have excellent credit and can get a home equity rate that's lower than available auto loan rates
• If you need flexibility in payment amounts and timing
• If you're confident you can pay it off quickly

The bottom line: Without the tax advantage, a home equity loan for a car is rarely the best choice. In most cases, you're better off with a traditional auto loan or, better yet, credit union financing.