HELOC Loans Vs Credit Card Debt
Is a Charge Card or Home Equity Line of Credit the Better Option?
Jul 3, 2009
Home equity lines of credit, better known as HELOC loans, extend a line of credit to a homeowner that can be utilised at any time during the 'drawing period'. This should be contrasted with a home equity loan where a homeowner receives immediate and full payment. HELOC loans are similar to credit card debt as a consumer is extended a line of credit and only pays interest on the amount spent.
HELOC Loans are Secured Debt
Home equity lines of credit are granted to homeowners who have sufficient home equity available. A HELOC loan is secured on the family home. Failing to keep up with monthly repayments can lead to mortgage foreclosure as the property acts as collateral in the event of default. Although attracting a higher APR, credit card debt is not secured. Should money problems ever become an issue, a consumer can consider a debt solution, such as debt settlement, filing for bankruptcy or a Debt Management Plan.
Credit Card Debt Means Higher Monthly Repayments
As credit card debt isn't secured, default rates are a lot higher than on HELOC loans. For example, Wells Fargo said that default rate on charge cards was 10.03% in April 2009. The Federal Reserve Survey of Consumer Finances in February 2009 stated that the median interest rate on unpaid balances was 12.5%. Home equity lines of credit are available at 8% which would mean that a lower percentage of household income would go towards debt repayments.
Borrow More with a Home Equity Line of Credit (HELOC)
Whilst many consumers are able to get several charge cards, most providers are reducing credit limits. Furthermore, the high interest rate on credit card debt makes them unsuitable for very expensive purchases, especially if over an extended period of time. As HELOC loans are secured on a property, provided sufficient home equity exists, it is possible to borrow a larger sum of money for debt consolidation, home improvements or if buying a car. Monthly repayments are also easier to manage as they are typically just made to one lender.
Prevent Money Problems with a HELOC Loan
Credit card debt should never be seen as a viable source of long term borrowing due to high interest payments. A HELOC loan provides a line of credit at an affordable APR that can be used when ever money problems become an issue. Homeowners could even switch from a repayment to interest-only home equity line of credit to help in terms of affordability.
Negotiating Money Problems When a Borrower Defaults
As credit card debt is unsecured, a borrower could pursue a debt solution, such as a Debt Management Plan, filing for bankruptcy or debt settlement. Those borrowing money have more options should they default on an agreement. A HELOC loan is a source of secured debt so it isn't possible to write-off debt without losing the family home. However, filing for bankruptcy will give a family time to come to terms with their money problems.
Both HELOC loans and charge cards are useful, but credit card debt should never be allowed to continue indefinitely. Long term borrowing should be performed through a home equity line of credit as the cost of credit is more affordable. The risk of a HELOC loan is that a homeowner defaults on the agreement; neither debt settlement or a Debt Management Plan (DMP) are an option.
Sources
Bucci, Steve. (May 18, 2009). "Pros, cons of paying car loan with HELOC." The Boston Globe.
(15 May, 2009). "Credit Card Defaults Reach Record Highs in April." Reuters News.
Federal Reserve Survey of Consumer Finances - February 2009
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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