Should you take out an equity loan to pay off credit cards?
Should you venture into deep financial debt with a home equity loan to remove credit card debt is a question on which only strong analysis will allow a proper solution. The answer to the question is very dependent upon the individual or family unit upon how deeply in debt and the reasoning the debt has been amassed.
One of the most important questions to be asked and answered in a solid and totally truthful reply is: “Will and can the applicant not again venture into credit card debt”. By paying down high interest debt with a highly leveraged home equity loan and falling back into irresponsible action of over-extension of credit cards. If the reason for getting into trouble with credit card balances in excess of reasonable payoff is unnecessary purchases and flamboyant spending it must not be repeated. Only necessary and reasonable purchases on the credit card will be allowed after the extension of a home equity loan. The single best rationale for a credit card is convenience using same for day to day purchases of gas, travel and on the road expenses where large amounts of cash is a burden and dangerous to carry. The safety and convenience factor should be such that the full amount of expenses is repaid at the monthly statement so as to not incur finance charges. Having many credit cards, air travel, motel/hotel and major credit cards can be difficult to manage and with much travel I always found it important to pay off each when the statement arrived. Over dozens of years and such travel never did I allow a balance to accumulate a finance charge. An individual, not needing such thousands of dollars each month, a single major card and store/gas card is more than adequate.
All too often credit cards are offered to consumers with large lines of credit and no concern in that person’s ability to pay off and maintain a good credit rating. Just because the credit card companies provide you access does not mean you must accommodate them by overspending.
Before even considering the bailout of a home equity loan the home owner must analyze how much is needed versus existing equity in the property being leveraged. Many lending institutions make loans in large amount $20,000 to $50,000 which may not all be needed placing an even greater burden on ones repayment program. Credit monitoring and rating bureaus watch such transactions and they could become adverse to the home-owner’s ability to make other major purchases, in the future, at a good credit rate if available at all.
A very good piece of advice; and in my belief should be mandatory, is financial counseling to those applying for a home equity loan based on repayment or consolidation of other outstanding loans. Appropriate counseling will provide a basis for the borrower with a blueprint for going forward and keeping out of credit trouble.
The numbers of course must be crunched by the loan officer prior to any granting of the loan and the applicant can rationalize or have an advocate determine if the transaction is a good idea. Lowering a monthly payback with a better rate will most certainly help even the most frugal of money managers over troubling times and get back on a sound financial footing. Once the decision to follow a home equity loan it is imperative the inappropriate spending be reigned in or total disaster is sure to follow. Credit cards must be used appropriately and spending checked; if not and the applicant refuses to control debt there is no hope to save this individual.
In the final analysis allowing for a viable monthly payment which could not otherwise be made, say a reduction of $1200.00 credit card versus an $800.00 loan payment over an approximate same length of time is surely advisable. Loss of job or large medical bills can place the lender with no alternative than to consolidate. Be certain the loan can be paid off at an accelerated rate once the financial condition allows, as credit cards can be fully paid down in one lump sum. It must also be weighed that filling for a bankruptcy due to credit card debt usually saves the primary residence whereas defaulting on an equity loan can result in loss of the home. Tread with caution and if unsure get advice from a trusted advisor just as asking how deep the water is if you are new to the pond and can’t swim. Ask before you leap.