Using HELOC for vehicle purchase: can this be done wisely?

Question

I have a chevy suburban lined up to purchase for 10k. By my research, it has a market value of 13k. My goal is to keep monthly payments as low as possible while also being financially responsible. My options are:

1. a traditional car loan, which would prob equate to 250-$300/month payment
2. using my existing (unused) HELOC to purchase the vehicle and paying only interest on the amount...probably around $45/month. I have a HELOC line of $120k and no additional debt.

Normally, i would never use a HELOC to purchase a vehicle, but my current situation has me reconsidering and I'd love your input.

My thought process is this:

1. purchase this vehicle with HELOC
2. pay ONLY interest UNTIL the market value is in line with what i paid for it (maybe 2-3 years?).

3. when market value aligns with what i paid -

   a) sell the vehicle and pay off the HELOC. in this scenario i would have had a great car for 2-3 years and only paid $45/month for it...then i could 'rinse and repeat' or go a diff route altogether

   b) begin making principal payments as well in order to keep pace with further depreciation

So far, when i run this idea by people i've received general feedback along the lines of 'that's the worst idea i've ever heard'. to me it seems like a low risk situation. At worst, i wouldn't be able to recouple all that i spent on the vehicle, leaving me in a position to cover the difference in sale. This amount would likely be rather reasonable. I'm not too worried about having a 10k lien against my home as i have 120k in equity and even if i didn't, its not enough to sink me financially.

upside (in my eyes) - great car for super low payments, leaving me an extra 250-$300/month to put into an emergency fund or other savings account.

downside - might not be able to recoupe all i paid and have to pay a smallish lump sum upon sale (if i chose to sell when market value equals the amount i paid).

my question to you is 'what am i missing?' Surely there is a reason that people thus far have reacted so negatively. Or are they just having a knee-jerk reaction based upon the insanity of the recent crisis where people were using home equity for luxury items and then ending up under water? given the amount of the purchase and the likelihood of recouping my payment price, i feel like this is a reasonable risk/reward scenario. what do you think? i appreciate your perspective and input!

Answer 1

A few things I can think of, in no significant order:

1. 4.5% is apparently about average for a used car loan, but maybe you could get a better rate through dealer financing, I frequently get offers for 0.9% interest on certified pre-owned cars. Of course in that case you'd be making payments in excess of interest-only, but that means you'd have more equity when you sell (even moreso if you just paid cash).

2. You might be over-estimating the likelihood it will sell the vehicle for $10k in 2 years, and will be left taking a bigger hit.

3. Sales tax is due on the value of the vehicle, so you'll pay Washington's 6.5% sales tax on the $13k even if you pay $10k. This doesn't really factor in to a financing decision, but it does increase cost of frequent car purchases vs keeping a car long-term approach (with a newer car at least people feel like they are being spared expensive repairs which might offset the costs of having a newer vehicle, no such benefit when looking at a ~10-year old Suburban).

4. Most HELOC's are variable rate, rates could increase. There could be fees for converting it to a fixed-rate product before the draw period ends.

5. You might regret having $10k of your HELOC tied up, if something happened where you had a bigger need for your HELOC. Alternatively, market tanks and your equity vanishes, still owe $10k and can't get out from under your house. That feels pretty extreme, but better to have a car repossessed than a home foreclosed upon.

It could work out nicely if it really would sell for your purchase price after a couple years, honestly none of the above seem like that big of a deal to me. I dislike the interest and the sales tax, so I wouldn't do it. I wouldn't count on used-car resale to justify a financing scheme, but at $10k it seems unlikely that you'll regret it much even if things don't go quite how you hope.

Answer 2

The Lower the rate the better

In general, the lower the interest rate the better. You can lower your interest rate by using a secured asset to back it up. The lender is more willing to lend you the money (and therefore more willing to offer more competitive rate) because the have access to a valuable asset if you can't pay. The type of asset that you use to secure your loan only matters if you go through bankruptcy. An auto lender can still go after your house if they get the car and it isn't enough...

Borrowing Wisdom

The usual concerns with borrowing money apply no matter where you are borrowing money from. If you are using it to purchase an asset that will increase in value over time, then you have the advantage that selling the asset will be able to pay off the loan - and then some, as long as the rate of the loan is less than the amount the asset increases in value.

Whereas, assets that decrease in value over time (such as car) can become very expensive. Particularly if the car has expensive mechanical issues. Not only do you have to pay off the loan, the depreciation (decrease in value) but you also have to pay for expensive repairs.

If the value of having the vehicle is more than the cost of the interest, depreciation, mechanical repairs and running costs, then it makes sense.

However, it could become a money pit, and if you had additional unforeseen financial problems (e.g. through loss of employment, ill health, etc.), you could end up in the 'death spiral' where your income doesn't cover the interest payments on your home and car. I have been there. It is not fun.

Consider Alternatives

I would consider options where you don't have to take out more money. Can you wait a few months to save up enough that you don't need to borrow? If you waited a year, you could probably buy that same suburban for less, not have to pay the additional costs for the loan, and be in a better financial position if something unforeseen happened.

8lue Book Values

As far as relying on blue-book values... I am not convinced you can rely upon them. As the vehicle gets older and as the market values change the blue book values can change. Dealers seem to be one step ahead of them, so could be trying to offload inventory before an upcoming decrease in blue book value. How much will it cost you if you end up holding onto it another 5 years? At what point would you cut your losses?

I know someone who bought a new car from another country because it was cheaper to buy it new, import it and sell it after six months, even once you did all the taxes and import duties. Six months later, local prices adjusted, and it was no longer possible to sell it for more than he paid for it. That was 15 years ago, and he still has the car today.