For people stuck in credit card debt, it is undeniably both a challenging and trying situation. Credit cards tend to charge extremely high rates of interest, sometimes close to twenty percent, an interest burden which is tremendously difficult to meet for someone in financial hardship or recently unemployed. Sometimes, the rate becomes so high that the credit card customer feels they have no way of ever paying it off.
For people like this, an equity loan or HELOC can be a great way to pay off your credit card debt. However, there are a few important points a debtor should consider before deciding to make this important financial decision, namely the question of should you take out an equity loan to pay off credit cards?
What is the rate on the equity loan?
It’s key to ensure that the rate you are paying on your equity loan is lower than the interest rate you are paying on your credit card debt. If the rate is higher, then this is clearly counterproductive and you will be doing absolutely nothing to improve your current financial situation.
Are there any covenants or restrictions associated with the loan?
Often, banks and other lenders will impose restrictions or covenants on borrowers to ensure that they are able to make their interest and principal payments. When investigating an equity loan, it is critical to ensure that you can meet the restrictions and rules the lender would like to enforce. If not, you will be faced with an adverse legal and financial situation as a result of violating a covenant.
Are you credit worthy enough to obtain a loan from a bank or other lender?
It’s key to determine whether you can actually obtain an equity loan based on lenders’ lending criteria. Identify all of the documentation and information you will need to ensure this is an attainable option for you. If you do lots of research only to discover that there is no way you can get a loan of this nature, then there will have been quite a bit of wasted effort expended on this endeavor.
It’s clear that credit card debt is very burdensome and challenging for people to deal with. However, if the situation is right, an equity loan can be a great option for someone who is struggling with credit card debt. By following the tips provided in this article, you will be on your way to paying off your credit card debt, taking an equity loan and improving your financial situation for years to come. Hopefully this article has provided you with more understanding as to whether you should take out an equity loan to pay off credit cards.