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Luxury cars can be a thrill to own and drive, from their elevated design to their high-performance engines to their posh finishes. They cost more than your basic set of wheels, so it’s likely understandable that they generally have high maintenance costs. You can spend thousands of dollars maintaining an Audi, BMW, Jaguar, Lexus, Mercedes-Benz, or any other luxury car brand.

Below, you’ll learn the average maintenance cost for luxury vehicles, plus which makes and models have the cheapest and most expensive maintenance costs. This can help you understand what charges may await you if you decide to splash out on a high-end car. Plus, you’ll learn how to finance those costs.

What Is the Average Maintenance Cost for a Luxury Car?

The average 10-year maintenance cost for a luxury car is almost $13,000, according to an analysis of data on CarEdge.com, an automotive research and vehicle listings marketplace.

CarEdge documented 10-year maintenance costs for more than 200 unique car makes and models and found that overall, Tesla had the cheapest maintenance cost at $4,287. Bentley, meanwhile, had the most expensive maintenance cost at $36,522.

Which Luxury Car Has the Cheapest Maintenance Costs?

These five luxury car brands have the lowest maintenance expenses, according to CarEdge’s rankings and data as of 2025:

1. Tesla

Tesla vehicle models have an average $4,287 in maintenance and repair costs during their first 10 years of service. Tesla is classified as a low-maintenance luxury car brand in CarEdge’s rankings. Electric cars tend to be popular with millennials, according to car ownership in the U.S. surveys.

2. Lexus

Lexus car models share an average $7,130 maintenance and repair cost during their first 10 years of service. Lexus is a luxury brand division of Toyota Motor Corporation.

3. Genesis

Genesis is the luxury brand made by Hyundai Motor Company. The costs for maintenance were calculated to be $7,626 over the first 10 years.

4. Acura

Acura car models share an average $8,566 maintenance and repair costs during their first 10 years of service. Acura is a luxury brand of Honda Motor Co.

5. Alfa Romeo

Alfa Romeo car models share an average of $8,733 in maintenance and repair costs during their first 10 years of service. Known for its Italian heritage, Alfa Romeo is one of 14 brands owned by Stellantis, a multinational automotive company.

Recommended: 31 Ways to Save Money on Car Maintenance

Which Luxury Car Is Most Expensive To Maintain?

The most expensive car repairs can involve repairs to the engine or transmission. These five luxury car brands have the highest maintenance costs, according to CarEdge’s rankings and data as of 2025:

1. Bentley

Bentley car models share an average $36,522 in maintenance and repair costs during their first 10 years of service, according to CarEdge’s findings. Bentley makes ultra-premium cars, so this intel may not come as a surprise.

2. Land Rover

Land Rover car models share an average of $18,304 in maintenance and repair costs during their first 10 years of service. Land Rover is a brand of Jaguar Land Rover Automotive PLC, a manufacturer of luxury vehicles.

3. BMW

BMW car models share an average of $15,991 in maintenance and repair costs during their first 10 years of service. BMW is the flagship brand of BMW Group, a manufacturer of premium vehicles.

4. Jaguar

Jaguar car models share an average of $15,662 in maintenance and repair costs during their first 10 years of service. Jaguar is a brand of Jaguar Land Rover Automotive PLC.

5. Mercedes-Benz

Mercedes-Benz car models share an average of $12,962 in maintenance and repair costs during their first 10 years of service. Mercedes-Benz is a brand of the Mercedes-Benz Group, a luxury automaker.

Pros and Cons of Owning a Luxury Car

The table below highlights some of the pros and cons of owning a luxury car:

Luxury Car Maintenance vs Regular Car Maintenance Costs

When comparing the costs of luxury car maintenance vs. non-luxury car maintenance, here are some points to consider:

•   Luxury cars are generally more expensive to maintain

•   Electric cars have the lowest maintenance costs compared with hybrid and conventional vehicles

•   European luxury cars generally cost more to maintain than American or Asian luxury cars

•   Non-luxury American, Japanese, and Korean car models generally have the lowest 10-year maintenance costs overall

European luxury brands, including Land Rover, BMW, Mercedes-Benz, and Jaguar, have the highest 10-year maintenance costs, according to Consumer Reports.

Cars generally lose value over time, but luxury cars may experience a faster rate of car depreciation than non-luxury cars.

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Luxury Car Maintenance Cost Comparison

The Tesla Model 3 is the luxury car with the lowest maintenance cost, according to CarEdge. Luxury car maintenance costs can vary by make and model. Using CarEdge data, here is a table comparing the maintenance costs of luxury cars from cheapest to most expensive:

Financing and maintaining a luxury car may come at a steep cost. Below, learn some of the key ways to pay for luxury car maintenance.

Cash or Debit

You could use cash or a debit card to pay for luxury car maintenance if you have enough money or sufficient funds in your checking or savings account. Bankrolling the maintenance costs can deplete your savings, but the upside to using cash is it completes a transaction without relying on a creditor.

Credit Cards

You can use credit cards to pay for luxury car maintenance. Some credit cards provide cash back on all purchases, but interest charges can be high, especially if you’re only making minimum payments. You can avoid credit card interest charges on new purchases by paying your statement balance in full each billing cycle. That, however, may not be possible if you’re purchasing a car that costs into the six figures.

Personal Loans

Here’s another option for financing your luxury car’s maintenance costs: You can take out personal loans. These products offer options, such as unsecured loan or a secured one, with your vehicle potentially serving as collateral. Personal loans provide borrowers with a lump sum of money and a payment schedule for repaying the loan over a set term.

Recommended: What Should Your Average Car Payment Be?

Refinancing Your Luxury Car

Auto refinancing can provide some relief if you need a lower monthly payment on your luxury car loan. Refinancing pays off your original car loan with a new loan agreement.

Typically, the goal for refinancing a car loan is to snag a lower interest rate and lower monthly payment. (Refinancing for a longer term may lower your monthlies but increase your total interest costs over the life of the loan.)

When To Refinance a Car

Your personal circumstances can help you determine whether and when to refinance a car. Refinancing may make sense if you have built your credit score and may qualify for a lower interest rate. Or perhaps, due to economic factors, rates have fallen enough that refinancing is a wise move.

Also, if you have equity in your car and are looking to pull some money out of that (say, to pay for maintenance, you might look into a cash-out refinance.

Pros and Cons of Auto Refinancing

There are some pros and cons of auto refinancing.

•   Refinancing may lower your monthly charges and the amount of interest you pay over the life of the loan.

•   However, refinancing could wind up costing you more in interest over time if you extend the loan’s term. Also, when you apply for a new car loan, the hard credit pull that’s usually performed can cause your credit score to drop several points temporarily.

Refinancing Your Luxury Car

If you refinance your luxury car, it’s smart to shop around and check rates. Consider the APR, or annual percentage rate, you qualify for, vs. simply the interest rate. That APR will give you a better idea of the true cost of the loan, since fees are factored in.

Once you’ve compared auto loans available from banks, credit unions, and online lenders, and decided which option is the best fit, you can move ahead with your application.

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The Takeaway

Luxury cars can be a major source of driving enjoyment and pride, but these vehicles are generally expensive to buy and keep up. Maintenance costs can average around $13,000 over a 10-year period. If you’re thinking about buying one of these cars or refinancing your current loan, it’s wise to shop around.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

How much is the maintenance cost for luxury cars?

The maintenance cost can vary depending on the make and model of the luxury car. These maintenance expenses can range from several thousand dollars to more than $30,000 over a 10-year period, according to an analysis by CarEdge.com, with an average of around $13,000.

Which of the luxury cars is cheapest to maintain?

The Tesla Model 3 has the cheapest 10-year maintenance cost at $3,257 in 2025, according to CarEdge, which classifies the Model 3 as a luxury auto. The vehicle is made by Tesla Inc., a manufacturer of fully electric vehicles.

Which luxury car is the most expensive to maintain?

Bentleys are the most expensive luxury car to maintain, with 10-year costs totaling more than $30,000 on average. These are very pricey cars to begin with, considered one of the most costly brands on the market.

Photo credit: iStock/bluecinema

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOALR-Q225-004

If you’re buying a car, it’s important to understand all the costs involved — including the finance charges — to make sure you’re getting the best deal. Finance charges on auto loans are the total cost of borrowing, including interest, fees, and any additional costs imposed by the lender over the life of the loan.

Read on to learn more about auto loan finance charges, how to calculate what you might pay, and ways to help minimize the cost.

What Are Finance Charges on Auto Loans?

A finance charge refers to an amount you pay to borrow money. When you get an auto loan, a finance charge is what you pay to borrow money to purchase the car.

Finance charges include interest and other types of fees that lenders impose. For example, the lender might charge a paperwork fee or an origination fee, or they might simply combine those types of fees and call it a finance charge. The charges might be separate from the interest on the loan, or they might be rolled into the cost of the loan. It largely depends on the lender and the terms of the loan.

In some cases, you may be able to minimize fees, or you may see offers to avoid origination fees, say. Read the fine print carefully to make sure you understand just what you are paying for and how.

Average Finance Charges for Auto Loans

The primary finance charge for most auto loans is interest. The interest rate you’ll be charged will generally be based on two factors:

•   Credit score: Those with higher credit scores often receive the lowest interest rates.

•   New or used car: Lenders impose higher interest rates on loans for used cars than they do on loans for new cars. Used car loans are seen as riskier since cars can depreciate rapidly and there may be condition issues with a pre-owned vehicle.

Here are some specifics according to Experian® as of the third quarter of 2024:

•   For those with the highest credit scores (known as super prime, or 781-850), a new car loan has an average interest rate of 5.08%, and a used car loan has an average interest rate of 7.41%.

•   For those with the lowest credit scores (deep subprime, or 300-500), the average rate for a new car loan is 15.43% and 21.55% for a used car loan.

It’s important to note that you won’t know your actual rate until you apply for a car loan, but these figures can give you a general idea.

Recommended: Does Financing a Car Build Credit?

Calculating Finance Charges on a Car Loan

It can be helpful to calculate the total finance charges on a car loan to get an idea of what you might have to pay. There’s a simple formula you can use to do this. First, gather all the information about the loan, including the loan amount, the annual percentage rate or APR, the length of the loan in months, and your daily balance.

Once you have the information, you can plug it into this finance charge formula:
​

To calculate the finance charge, multiply the loan amount by the APR. Then, multiply the length of the loan in months by the loan’s average daily balance. Divide the first number by the second. Take that amount and add any additional fees you’re being charged to it. The resulting number is your total finance charge.

Can You Avoid Finance Charges on a Car Loan?

Unless you can pay for a car outright, there’s no way to completely avoid a finance charge on car loan. However, car manufacturers occasionally offer 0% APR financing as a promotion on specific models. Just be aware that these offers will often be available as an option vs. other discounts you might get.

While it’s difficult to avoid a financing charge altogether, there are ways to minimize the costs. First, and perhaps most obviously, do shop around for the lowest interest rate possible, which can help save you money. Your first offer isn’t necessarily the best you’ll find.

Another way to minimize financing charges is to refinance your car loan. When you refinance with a lower APR, you’ll pay less in interest if you get a lower rate or shorten your term. In addition, you can always make extra car payments or pay off your loan early, if possible, in order to minimize the interest charges.

Paying Finance Charges on a Car Loan

Some car loan finance charges are paid at the time of purchase, while others are a part of your monthly payment. The specifics depend on your lender, your loan, and the terms of the loan. When you receive your car loan statement, it will spell out the finance charges as well as the principal amount of the loan.

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Do You Pay Finance Charges If You Are Refinancing a Car Loan?

When you refinance a car loan, you are paying off an existing loan and taking out another. And like all car loans, there is a cost to refinance a car. Some lenders charge fees, such as transaction and transfer fees, for refinancing.

However, you may be able to refinance for a lower interest rate and save money in interest overall. Find out what potential fees you might have to pay to see if refinancing at a lower interest rate is worth it for you.

The Takeaway

A finance charge on a car loan is the cost of borrowing money to buy the car. You’ll have to pay financing charges whether you’re taking out a new car loan or refinancing an existing car loan. By understanding what these charges are and how they are calculated, as well as shopping around for the best rate, you may be able to minimize these costs.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What are the finance charges on car loans?

The term finance charge is used to describe any cost you pay to borrow money. With a car loan, finance charges refer to the cost you pay for borrowing money to purchase the car. Finance charges include interest, fees, and any additional costs imposed by the lender over the life of the loan.

What is the average finance charge for an auto loan?

The average finance charge depends on the borrower’s credit score and whether the car is new or used. Lenders impose higher interest rates on loans for used cars than they do for new cars. For people with the highest credit scores, a car loan for a new car has an average rate of 11.38% as of May 2025. For those with the lowest credit scores, however, the average APR for a new car loan will be about 18.93%.

Are there any finance charges on refinanced car loans?

Yes, the finance charges that you’ll pay on a refinanced car loan are similar to those you pay when you first purchase a car. In addition, some lenders charge transaction and transfer fees, among others, for refinancing. You may be able to refinance for a lower interest rate and save money over the life of the loan. Just add up the costs to make sure refinancing is worth it for you.

Photo credit: iStock/Nastasic

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOALR-Q225-017

You may have seen personal loans advertised as starting at a certain interest rate or annual percentage rate (APR). But when you check your personal loan interest rate, you may find that what is offered to you is significantly higher. Why is that?

The average personal loan interest rate is dependent on several factors, including the amount borrowed, credit history, and income, among others. Average interest rates for personal loans may also differ depending on the type of the loan. Here are some factors that may affect the personal loan interest rate you’re approved for.

Average Personal Loan Interest Rates By Credit Score

The APR for a personal loan is calculated by looking at several factors, including the requested amount, the applicant’s income history, and the reasons for borrowing. One of the biggest factors, however, is an applicant’s credit score. In general, the higher a borrower’s credit score, the lower the loan interest rate they will be offered.

Here’s a look at average personal loan interest rates for different credit scores as of May 2025.

Factors That Can Lower Personal Loan Interest Rates

One thing to know about how personal loans work is that your unique credit profile will likely affect the interest rate offered to you. Here’s a look at some ways you may be able to qualify for a lower personal loan interest rate.

Building Your Credit Score

Building your credit score can potentially be a way to qualify for a personal loan with better rates and terms. Some strategies that can help you positively impact your credit profile include:

•  Checking your credit report It’s a good idea to get copies of your credit reports (you have three; one each from Equifax®, TransUnion®, and Experian®) and make sure that your personal information — e.g., name, address, phone number, Social Security number — is correct in each one. Also look for any erroneous public record information, such as lawsuits or bankruptcies filed that you were not a part of and any errors or inaccuracies in the credit accounts section. You can dispute any errors with the credit reporting agency.

•  Lowering your credit utilization ratio Your credit utilization ratio — the amount of debt you have compared to the amount of credit available to you — plays a large part in credit score calculation. Paying down your debt will lower this ratio. Financial experts suggest keeping the ratio at 30% or lower (10% or lower is ideal).

•  Avoiding late payments Late payments can have a large and lasting impact on your credit score. If there are any late payments in your history, you may be able to minimize their impact by creating a record of on-time payments moving forward. Setting up autopay for debt payments is one way to make sure those payments are made regularly and on time.

Secured vs Unsecured Personal Loans

How a personal loan works depends on the type of personal loan you choose. As you research loan options, you may come across options for secured and unsecured personal loans.

What’s the difference between a secured and unsecured personal loan?

•  A secured personal loan requires the borrower to pledge collateral to guarantee the loan. This collateral is something of value that the borrower owns, such as a car, investments, or a savings account. If the borrower cannot or does not make the loan payments, then the lender can seize that collateral to recoup its losses.

•  An unsecured personal loan, also called a signature loan, is backed by the borrower’s estimated creditworthiness. If the borrower can’t pay back the loan, the lender can’t take any of their property or valuables to recoup its loss. The lender can, however, take other steps to recoup its loss, such as suing the borrower, which may affect the borrower’s credit score and future financial options.

Personal loans are commonly unsecured loans. However, some lenders offer secured personal loans, which can allow borrowers with fair credit to qualify for a loan or get a better rate than they otherwise would with an unsecured loan.

Income and Employment Status

Your income and employment status may affect the rate you’re offered on a personal loan. Lenders generally see borrowers with solid, steady income as lower risk and, therefore, offer them lower rates. If you’re a freelancer, independent contractor, or business owner, you might need additional paperwork to prove your income than you would if you work a W-2 job.

If your income is irregular, having a creditworthy co-applicant may help you get approved for more favorable interest rates. Asking someone to be a co-applicant is a big commitment, though, and having a conversation about all that it entails can help alleviate any concerns of both parties.

Factors That May Increase Personal Loan Interest Rates

Lenders must assess how risky an unsecured loan might be and the likelihood of the loan being paid back. To do that, they look at the applicant’s credit history, employment status, and loan amount requested, among other factors. Here are some things that may lead a lender to think a loan is more risky — and potentially offer a higher rate to the borrower.

Credit Score

An applicant’s credit score is one factor that affects the personal loan interest rate they might be approved for. In general, the lower the applicant’s credit score (which indicates poor management of credit in the past), the higher the rate of interest they will be offered. Improving your credit over time may make it possible to qualify for a loan with a lower interest rate.

Debt-to-Income Ratio

Debt-to-income (DTI) ratio refers to how much debt someone has in relation to how much income they have. To calculate your DTI, you add up your monthly debts (including mortgage payments, car payments, and credit card payments) then divide that number by your gross monthly income and multiply by 100. DTI ratio is expressed as a percentage. In general, the higher your DTI ratio, the riskier you may seem to lenders. Each lender sets its own DTI ratio requirement.

Unemployment

A personal loan application will ask for proof of income, usually in the form of W2s or tax returns from prior years. The lender wants to know that a borrower has a steady source of income. If a loan applicant is unemployed, it may be harder — but not impossible — to have a loan approved.

Recent Bankruptcy

Bankruptcy will appear on an applicant’s credit report and stay there for seven to 10 years, typically making it challenging to be approved for a personal loan. Applying with a cosigner can make it easier to be approved for a personal loan after recent bankruptcy. But keep in mind that if you are unable to repay the loan, your cosigner would be responsible for the debt.

Is a Personal Loan the Right Choice for You?

Individual circumstances really determine whether a personal loan is the right choice for any one person.

•  A personal loan can be a good option for people who want to consolidate high-interest debt, like that of credit cards, to save money. For a debt consolidation loan to be successful, it’s important to discontinue using the credit cards to accumulate more debt.

•  Having a fixed interest rate and steady payment amount can be helpful when using a personal loan to cover a big purchase. A personal loan is installment debt with a payment end date, in contrast to the revolving debt of a credit card.

•  A personal loan is still debt and increases a person’s overall debt load, so it can be a good idea to have a sense of how you’ll repay it. Making late payments or failing to repay the loan can negatively affect your credit score.

A personal loan rate calculator can be a helpful tool to estimate your personal loan rate and will not affect your credit score. Your offered rate may vary slightly when you officially apply for a loan, but an estimate can give you a good benchmark for comparison.

Recommended: How to Apply for a Personal Loan

The Takeaway

Personal loan interest rates vary depending on an applicant’s financial circumstances but can also vary by lender, so it can make sense to shop around for rates. If your credit profile is not as strong as it could be, you may want to work on building your credit before applying for a personal loan. This can help increase your chances of loan approval, as well as your odds of getting approved for a loan with a favorable interest rate.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is a good interest rate on a personal loan?

A good interest rate on a personal loan could be under the almost 14.00% average for those with superior credit as of May 2025. At that time, some of the lowest rates for personal loans began at around 7.99%.

Is 10.00% a good personal loan rate?

Yes. If you have good to very strong credit (720-plus), you could qualify for a 10.00% APR, which is considered a good personal loan interest rate. It is lower than the average personal loan rate for borrowers with excellent credit, which is 13.88% as of May 2025.

Is 12.00% a good personal loan rate?

Yes, a 12.00% APR is considered a good personal loan rate as of May 2025. You would probably need a very strong credit score (possibly 720 or higher) to qualify for this rate. It beats the average personal loan interest rate for excellent credit, which is 13.88%.

Which bank has the lowest interest rate on personal loans?

According to Forbes Advisor, the best low-interest personal loans are currently available from SoFi, Upgrade, LendingClub, PenFed, Happy Money, and U.S. Bank.

What is a personal loan interest rate?

A personal loan’s interest rate is the cost you pay each year to borrow money expressed as a percentage. The interest rate does not include fees charged for the loan. The annual percentage rate (APR) of a personal loan is the cost you pay each year to borrow money, including fees, expressed as a percentage. The higher the APR, the more you’ll pay over the life of the loan.

What is the interest rate on a $40,000 loan?

The interest rate on a $40,000 personal loan will depend on the lender, the loan’s term, and the creditworthiness of the borrower. The APR can range anywhere from the single digits to 35.99% or possibly higher.

What is a good interest rate for an unsecured personal loan?

A good interest rate for an unsecured personal loan can range anywhere from 7.99% to 13.88% as of May 2025. However, you will likely need to have excellent credit to qualify.

Photo credit: iStock/alexsl

SOPL-Q225-088

If you’re like many people, your home is probably your biggest asset, so you might think it makes sense to include it in your net worth. But this may not always be the best idea.

Here’s why: All your assets usually should be tallied as part of your net worth. But some financial advisers argue that the money you’ve invested in your home is different from other assets. If most people were to sell their home and move, they would have to put the funds from the sale toward buying or renting a new home. The home you live in isn’t easily liquidated if you need money to pay for other things.

The specifics of your situation can also determine whether or not to count your home equity in your net worth. And there is no downside to calculating it both ways. Generally, when using tools to tap your home equity, you may want to include your house as part of your net worth. But when calculating retirement savings and in some other situations, it’s a no-go.

Read on to learn more about when home equity counts in your net worth.

Why Is Knowing Net Worth Important?

Your net worth will fluctuate over time, but it can always be a valuable way to chart how your finances are going. If your net worth is negative, that means you have more debts than assets. This might encourage you to budget differently or focus more on paying off debt, especially high-interest debt.

If, however, your net worth is positive, that can help you see how you are progressing toward financial goals and what funds you will have available for, say, retirement.

Calculating Net Worth

At its most basic, net worth is everything you own minus everything you owe.

To calculate your net worth, tally the value of all or your assets, including bank accounts, investments, and perhaps the value of your home or vacation home. Then subtract all of your debts, including any mortgage, student loans, car loans, and credit card balances.

If the resulting figure is negative, it means that your debts outweigh your assets. If positive, the opposite is true.

There is no one net worth figure that everyone should be aiming for. Your net worth, though, can be a personal benchmark against which you can measure your financial progress.

For example, if your net worth continues to move into negative territory, you know that it is time to tackle debts. Hopefully, you’ll see your net worth grow, which can give you some idea that your savings plan is working or your assets are increasing in value.

Your home may, strangely, function as both an asset and a liability. Your home equity — the part of the home you actually own — can be an asset. But your lender may still own part of your home. In that case, mortgage debt is a liability.

As you track your home value and other assets to take your financial pulse, you may find that your home is simultaneously your biggest asset and biggest liability.

Recommended: What Credit Score Is Needed to Buy a Car?

When to Include Home Equity in Net Worth

Generally speaking, you may want to include your home as part of your total assets and net worth when you want to leverage the value of the equity you have stored there.

You can tap the equity in your home with a number of financial products. Here’s a closer look:

Home Equity Loan

A home equity loan allows you to borrow money that is secured by your home. You may be able to borrow up to 85% of the equity you have built up. For example, if you have $100,000 in home equity, you may have access to an $85,000 loan.

The actual amount you are offered will also be based on factors such as income, credit score (which may differ among the credit bureaus — say, between TransUnion vs. Equifax), and the home’s market value.

You repay the lump-sum loan with fixed monthly payments over a fixed term.

As with home improvement loans, which are personal loans not secured by the property, you can use a home equity loan to pay for home renovations.

Or you can use a home equity loan for goals unrelated to your house, like paying for a child’s college education or consolidating higher-interest debt.

Just remember that if you fail to repay the loan, the lender can foreclose on your home to recoup its money.

Home Equity Line of Credit

A home equity line of credit (HELOC) is not a loan but rather a revolving line of credit. You may be able to open a credit line for up to 85% of your home equity.

How do HELOCs work? You can borrow as much as you need from your HELOC at any time. Accounts will often have checks or credit cards you can use to take out money. You make payments based on the amount you actually borrow, and you cannot exceed your credit limit. HELOCs typically have a variable interest rate, although some lenders may allow you to convert a portion of the balance to a fixed rate.

HELOCs use your home as collateral. If you make late payments or fail to pay at all, your lender may seize your home.

Traditional Refinance

A traditional mortgage refinance replaces your old mortgage with a new loan. People typically choose this path to lower their interest rate or monthly payments.

They may also want to pay off their mortgage faster by changing their 30-year mortgage to a 15-year mortgage, for example, reducing the amount of interest they pay over the life of the loan.

How do net worth and home equity come into play? One important metric lenders use when deciding whether you qualify for a mortgage refinance is your loan-to-value ratio (LTV), how much you owe on your current mortgage divided by the value of your home.

The more equity you have built in your home, the lower your LTV, which can help you secure a refinanced loan and positively influence the rate of the loan.

Another option: A cash-out refinance vs. a HELOC.

Cash-Out Refinance

A cash-out refinance replaces your mortgage with a new loan for more than the amount of money you still owe on your house.

The difference between what you owe and the new loan amount is given to you in cash, which you can use to pursue a number of financial needs, such as paying off debt or making home renovations.

Your cash-out amount will typically be limited to 80% to 90% of your home equity, and interest rates are typically a little bit higher due to the higher loan amount.

Reverse Mortgage

A home equity conversion mortgage, the most common kind of reverse mortgage, allows homeowners 62 and older to take out a loan secured by their home.

Borrowers do not make monthly payments. Interest and fees are added to the loan each month, and the loan is repaid when the homeowner no longer lives there, usually when the homeowner sells the house or dies, at which point the loan must be paid off by the person’s estate.

When You Should Not Count Home Equity as Part of Your Net Worth

There are a few instances when it doesn’t make sense to include your home in your net worth, or you aren’t allowed to.

When Calculating Your Retirement Savings

If you’re using your net worth to get a sense of your retirement savings, it may not make sense to include your home, especially if you plan to live there when you retire.

Your retirement savings represent potential income you will draw on to cover your living expenses. Your home does not produce a stream of income on its own, unless you tap your equity using one of the methods above.

If You’re Applying for Student Aid

A family’s net worth can have an impact on eligibility for federal student aid. The more assets a family has, the more that need-based aid may be reduced.

However, the equity in a family’s primary residence is a nonreportable asset on the Free Application for Federal Student Aid (FAFSA®). Most colleges use only the FAFSA to decide aid.

Several hundred colleges, usually selective private ones, use a form called the CSS Profile, which does ask applicants to report home equity, though a number of schools, such as Stanford, USC, and MIT, have moved to exclude home equity from their considerations for aid.

When Becoming an Accredited Investor

An accredited investor may participate in certain securities offerings that the average investor may not, such as private equity or hedge funds. Accredited investors are seen to be financially sophisticated enough, or wealthy enough, to shoulder the risk involved with such investments.

To become an accredited investor, you must have earned more than $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, or you have a net worth over $1 million. However, you cannot include the value of your primary residence in your net worth in most cases. (An exception worth noting: There are certain FINRA licenses that allow a person to become an accredited investor independently of one’s finances.)

Tips for Improving Net Worth

If you are looking to build your net worth, you might try these tips:

•  Rein in your spending. If your net worth is not rising as you would like, you might assess if you are spending too much. You might be shopping out of boredom, trying to keep up with your peers (aka, FOMO or Fear of Missing Out), or be experiencing what is known as lifestyle creep, when your expenses rise along with your income.

•  Deal with your debt. Having debt, especially high-interest debt like the kind you can incur with credit cards, can make it hard to grow your net worth. If you are struggling to get on top of debt, you might look into debt consolidation options or working with a low-cost or free credit counselor.

•  Consider automating your savings. Many financial experts advise that you “pay yourself first” and immediately transfer some funds into savings when you get paid. In one popular budgeting method, the 50/30/20 Rule, it’s recommended that 20% of your take-home pay go toward savings and debt. In addition, you would probably want that money to grow, whether that means putting it in a high-yield savings account or investing in the market.

The Takeaway

Whether or not you include your home in your net worth will depend largely on what you’re trying to accomplish. If you plan to tap your equity, then it is an important figure to include. But it’s not always included when it comes to things like student aid or retirement income.

Having a handle on your home equity and keeping it growing is always worth the effort and hard work. The more it grows, the more it can contribute to your long-term financial goals.

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Photo credit: iStock/Chainarong Prasertthai