Why a Home Equity Loan is a Terrible Idea for Paying Off Debt
- Jason Cabler Celebrating Financial Freedom
- 2014 4 Apr
Have you ever considered taking out a home equity loan to consolidate your debt?
There are a lot of people out there giving personal finance advice that will advise you to do that when you have a lot of debt and you’re trying to get it paid down or paid off.
But I think consolidating your debt into a home equity loan is a very bad move, and I’ll tell you why in a minute.
First, I’ll let you in on why some “financial gurus” recommend consolidating debt into a home equity loan in the first place.
There are two main reasons:
It’s “easier” - The thinking is that you use the loan money to pay off all of your outstanding consumer debt. Then you only have one loan payment (the home equity loan) to deal with every month. It makes things easier and less confusing than paying multiple loans every month.
- You get a lower interest rate - You can use a lower interest home equity loan to pay off higher interest consumer debt, which will save you money on interest over time.
Of course, these sound like good reasons, and on the surface, maybe they are. Whenever you can reduce stress and confusion along with lowering your interest rate, that’s a great thing, right?
Why Do You Need a Home Equity Loan?
If you’re thinking about rolling all of your debt into a home equity loan, you need to figure out WHY you feel you need to do this in the first place. You should be asking yourself a couple of questions:
- Am I doing this to lower my payments because my debt is eating me alive?
- Have I considered the potential future consequences of using a home equity loan to consolidate my debt?
Here’s how I would answer those questions:
- If you have dug yourself a massive hole of debt, a home equity loan is not going to save you. All it does is move your debt from one place to another. Usually it’s not the debt that’s the actual problem, it’s the person (or people) that took out the debt in the first place.
Your behavior and attitude when it comes to debt have to change.
Paying off your credit cards and other debt with a home equity loan does not change the behavior that got you into debt in the first place. The result is that most people don’t change their habits and go right back to the credit cards, ending up in a much worse situation than what they started with.
I know, I know, you’re not most people.
Except you are.
- You also have to realize that there is a potentially dire consequence to paying off consumer debt with a home equity loan, and it is this: You are putting your house in jeopardy if you can’t pay off the loan.
Credit card debt, medical debt, and some consumer loans can be reduced or written off by the company if you just can’t pay it. That may ding your credit score for awhile (big woop, you don’t need a credit score anyway), but it’s better than having your house taken away from you.
Credit cards and medical debt are unsecured debt, which means they can’t seize any of your property if you can’t pay. Even with a vehicle loan, all they can legally take is the vehicle. Do you really want to put your home at risk if you run into problems and can’t pay?
Don’t put yourself in that vulnerable position.
Don’t end up broke and homeless.
So if you’re thinking about taking out a home equity loan to pay off your consumer debt, let me be clear if I haven’t already-
DON’T DO IT!!!
There is a better way.
A Home Equity Loan Won’t Change Bad Habits
Learn to change your habits when it comes to credit cards and debt. Make a written plan to pay off your debt that doesn’t involve putting your house on the line.
Quick fixes don’t work. Behavior change is the only fix that can work permanently without putting you at great risk. You can start by taking a look at my Celebrating Financial Freedom course that shows you exactly how to do that.
Have you ever used a home equity loan to pay off other debts? What was your experience?
Let me know in the comments.
Article originally published on Celebrating Financial Freedom. Used with permission.
Dr. Jason Cabler is a Christian personal finance blogger, author, and speaker. He teaches how to get out of debt and live a debt free lifestyle through his Celebrating Financial Freedom blog and self study course. His book How to Budget: The Quick and Easy Guide to Making a Budget That Works is now available (more info here). He can be reached for interviews or speaking engagements by email, and can be found on Twitter, Facebook, and Google +.
Publication date: April 23, 2014