Which is worse, credit card debt or a HELOC?
Just about everyone with a mortgage has had a bank try to sell them on the advantages of a HELOC. These loans are based on the amount of equity in a person’s home; a borrower essentially gets a loan for the amount of his or her home that they have paid off. Often, these loans are used to make home improvements, pay for a major upgrade such as a swimming pool or new deck, or the money is used to pay off high interest credit card debt.In fact, many banks market HELOCs as a solution to credit card debt. While it is true that most of these loans have lower interest rates than most credit cards, there are trade-offs for this kind of savings. The main difference between a HELOC and a credit card is what happens if the borrower can no longer make payments.If a person can no longer make payments on a credit card, then the account is sold to a collection agency. While the person’s credit is probably ruined, there isn’t much else that the bank can do. As unsecured debt, the bank or collection agency cannot take any of the borrower’s assets. With a HELOC, however, the loan is secured by the borrower’s house. That means that in the case that a person cannot make the payments, the bank has the right to foreclose on the home.For some consumers, this is a reasonable risk. If a family has a stable income, then a HELOC can be a good way to lower interest payments and get a lower monthly payment on their debt. No job, however, is perfectly stable, and all too often someone who thought that they would have no problem making payments discovers that he or she cannot afford their loan.In many cases, a better option is to take out a debt consolidation loan for the credit card debt. This will give a borrower the same low interest rate as a HELOC, but the loan is not tied to his or her home. Every debt consolidation loan comes with access to a free debt counselor, who can review a family’s budget and make sure that they can afford the loan while building their savings. This means that they will be able to continue to make payments even if they lose a portion of their income.