How does the calculator compare the two loans?
Both loans borrow the same amount. For each, the calculator finds the level monthly payment at its own rate and term, then multiplies by the number of payments and subtracts the amount borrowed to get total interest.
On the home equity side, it multiplies total interest by one minus your marginal tax rate to get an after-tax interest cost. With the tax rate at zero, which fits most vehicle purchases, the after-tax cost equals the total interest.
After-tax savings is the auto loan's total interest minus the home equity loan's after-tax interest. A positive number favors home equity; a negative one means the auto loan costs less. Fees, closing costs and the value of keeping your house unencumbered are left for you to add.
Payment = A × r(1 + r)^n ÷ ((1 + r)^n − 1), for each loan Total interest = Payment × n − A Home equity after-tax interest = Total interest × (1 − t) Savings = Auto interest − Home equity after-tax interest
- A
- amount to finance
- r
- each loan's annual rate ÷ 12
- n
- each loan's term in months
- t
- marginal tax rate, applied only if the interest is deductible
Example: $28,000 through a 60-month auto loan or a 10-year home equity loan
Scenario: A homeowner needs $28,000 for a car. The auto loan offer is 7.6% for 60 months; a home equity loan is offered at 7.1% for 120 months. The interest would not be deductible, so the tax rate is 0%.
- Auto loan payment$28,000 at 7.6% for 60 months = $562.39
- Auto loan interest$562.39 × 60 − $28,000 = $5,743.40
- Home equity payment$28,000 at 7.1% for 120 months = $326.55
- Home equity interest$326.55 × 120 − $28,000 = $11,186.00; after tax at 0% = $11,186.00
- Savings$5,743.40 − $11,186.00 = -$5,442.60
Despite its lower rate, the home equity loan costs $5,442.60 more in interest, so the auto loan is the lower-cost option.
Matched at 60 months, the home equity loan would cost $5,345.60 in interest and save $397.80, before any closing costs.
When is this comparison worth making?
You have been offered a home equity loan or line
If a lender suggests tapping equity for a car, run both options for the same amount to see whether the lower rate survives the longer term.
Your auto loan rate is high
If credit issues have pushed your auto rate up, a home equity rate may be noticeably lower. The calculator quantifies the gap so you can weigh it against the risk.
You are considering a very long payoff
A low home equity payment may be tempting. The comparison shows how much more interest a 10- or 15-year payoff costs for a car you may replace well before then.
You are checking a tax claim
If someone tells you the interest is deductible, set the tax rate to zero first. Only use your marginal rate after confirming with IRS rules or a tax professional that the interest truly qualifies.
What mistakes make home equity look better than it is?
Assuming the interest is deductible
Home equity interest is generally deductible only when the loan is used to buy, build or substantially improve the home that secures it. Using it for a car usually does not qualify.
Comparing rates on mismatched terms
A lower rate over twice as many months often produces more total interest. Match the terms, or compare total interest rather than rates.
Forgetting closing costs
Appraisal, origination and recording fees can add up. In the example, $750 of costs would more than wipe out the $397.80 the matched 60-month home equity loan saves.
Outliving the car with the debt
Paying for a car over 15 years can leave you making payments long after you have sold or scrapped it. That leftover debt reduces your home equity.
Overlooking variable rates
A home equity line of credit often has a variable rate that can rise. This calculator assumes fixed rates on both loans.
How does the home equity term change the comparison?
The rate gap in the example is half a percentage point in favor of home equity. Whether that gap saves money depends almost entirely on how long you take to repay. The table keeps the $28,000 amount and the 7.1% home equity rate and compares each term with the 60-month auto loan at 7.6%, which costs $5,743.40 in interest.
Only the matched 60-month term saves money, and even there the saving is modest enough that closing costs could cancel it. Each longer term costs more than the auto loan, and the 15-year version costs about three times as much in interest. A lower rate cannot make up for paying interest on a car for years after it has lost most of its value.
| Home equity term | Home equity payment | Home equity interest | Savings vs auto loan | Lower cost |
|---|---|---|---|---|
| 60 months | $555.76 | $5,345.60 | $397.80 | Home equity |
| 84 months | $423.97 | $7,613.48 | -$1,870.08 | Auto loan |
| 120 months | $326.55 | $11,186.00 | -$5,442.60 | Auto loan |
| 180 months | $253.24 | $17,583.20 | -$11,839.80 | Auto loan |
Terms used on this page
- Loan-to-Value Ratio (LTV)
- Loan-to-value ratio compares the amount you borrow with the value of the asset securing the loan, shown as a percentage. A $20,000 loan on a $25,000 car is 80% LTV. Lenders use LTV to judge risk: a lower ratio usually brings easier approval and better rates, while an LTV above 100% means you owe more than the asset is worth.
- Line of Credit
- A line of credit is a flexible borrowing account that lets you draw money up to a set limit, repay it, and borrow again. You pay interest only on the amount you have drawn, not on the full limit. Personal, business and home equity lines are common, and most carry variable interest rates.
- Loan Term
- The loan term is the length of time you have to repay a loan, usually stated in months for consumer loans. A longer term lowers the monthly payment but increases the total interest you pay, because the balance stays outstanding longer. A shorter term costs more each month and less overall.
- Interest Rate
- An interest rate is the price of money, stated as a percentage of the balance per year. Borrowers pay it to lenders, and savers earn it from banks. The rate alone does not include fees or compounding, so it can understate the true yearly cost of a loan or overstate a simple comparison of savings accounts.
Home Equity vs. Car Loan Calculator: common questions
Is home equity loan interest deductible if I use it to buy a car?
Generally no. Under current IRS rules, home equity interest is deductible only when the borrowed money is used to buy, build or substantially improve the home securing the loan, and only if you itemize. Buying a vehicle does not meet that test, so leave the tax rate at zero unless a tax professional confirms otherwise.
Should I use a home equity loan to buy a car?
It is usually hard to justify. The rate may be lower, but the comparison often favors the auto loan once terms are matched and closing costs are counted, and your home becomes collateral for a depreciating asset. It can make sense only in narrow cases, such as a much lower rate repaid over the same term as an auto loan.
What are the risks of buying a car with home equity?
The main risk is that your home secures the debt, so falling behind could put it in jeopardy rather than just the car. You also reduce the equity you might need later, and a long term can leave you owing on a car you no longer have. Variable-rate lines can also become more expensive.
Is a HELOC better than an auto loan for a car?
A home equity line of credit works similarly but usually has a variable rate and flexible draws, which makes the comparison less predictable. If the rate rises, the cost can exceed the auto loan's. This calculator assumes fixed rates, so treat a HELOC rate as a starting point, not a guarantee.
Can I deduct interest on a regular car loan?
Personal car loan interest has generally not been deductible. A temporary federal deduction for interest on certain new-vehicle loans was enacted for tax years 2025 through 2028, with income limits and eligibility requirements. Check current IRS guidance or a tax professional; this calculator does not model that deduction. Interest on a loan used for a business vehicle may be deductible as a business expense, subject to separate rules.
What closing costs come with a home equity loan?
Common costs include appraisal, origination, title and recording fees, though some lenders waive or absorb part of them. They are not included in this calculator. Add them to the home equity side, or subtract them from the savings figure, to compare fairly. Some lenders that waive costs require you to keep the loan open for a minimum period or repay them if you close it early.
What does a negative savings figure mean here?
A negative number means the home equity loan's after-tax interest is higher than the auto loan's total interest, so the auto loan costs less. That is common when the home equity term is longer than the auto loan term. Try matching the terms to see the effect of the rate alone.
Does using home equity affect my ability to refinance my mortgage?
It can. A home equity loan adds a second lien and raises your combined loan-to-value ratio, which some lenders consider when you refinance or apply for other credit. You may need to pay it off or have the second lender agree to stay in second position. It can also limit how much you can borrow against the home later, for repairs or emergencies, while the car is still being paid off.
Sources
- Publication 936, Home Mortgage Interest Deduction — Internal Revenue Service. Accessed October 17, 2026.
- Topic no. 505, Interest expense — Internal Revenue Service. Accessed October 17, 2026.
- Auto loans — Consumer Financial Protection Bureau. Accessed October 17, 2026.
We cite primary sources: regulators, central-bank data and federal agencies. Worked examples on this page are our own calculations, last checked October 17, 2026. See our methodology.