Unsecured Credit Card Debt Consolidation Mistakes: Home Equity Loans
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As we have discussed in previous articles, consumers have many different choices and options for unsecured credit card debt consolidation. While the options for consolidating your debt are numerous, it is important to choose the right option for your situation and avoid making costly errors. Otherwise, you could end up even deeper in debt.
Today we will look closely at what has become one of the most widely used methods of consolidating and eliminating credit card debt and unsecured debt: Home equity loans and refinancing. This can be a smart decision for some, allowing them to save lots of money on interest and pay the debt off at a much lower interest rate. However, there are a couple of major pitfalls that you will need to avoid if you consolidate your unsecured debt and credit cards in this way.
Turning Unsecured Debt into Secured Debt
Credit card debt, medical bills, personal loans, and many other debts that people commonly pay off with home equity loans are unsecured debts. This means that there is no collateral on these debts. If you fail to meet your payment obligations on these types of accounts, your creditors cannot simply foreclose on your home or repossess your car like they could on secured accounts.
For example, your mortgage loan is secured by your home, and your car usually serves as the collateral that secures your auto loan. So when you default on your mortgage, the bank can foreclose on your home, and when you default on your car loan, the bank can repossess your car. In fact, it is relatively easy for the bank to pursue those options when you do not make your payments.
When you default on your credit cards and other unsecured debts, there is no simple, easy way for your creditors to collect because there is no collateral that the creditors have a right to take. To pursue any collection method other than calling you and asking you to pay, the creditor would have to take you to court and get a judgment against you. Even then, it is very unlikely that you would be losing your home or car over an unpaid credit card.
When you consolidate your credit cards (and any other unsecured debt) using the equity in your home, you are essentially converting these unsecured debts into a debt that is now secured by your home. Your house now serves as collateral on this debt.
Now, if something happens and you are unable to make your payments, you are putting your home at risk, and the bank now has a claim to your house.
Most people feel that they will be able to make their payments, so this is not an issue for them. However, very few people consider the very real possibility of an unforeseen event causing them to default on their debt payments. What if any of the following were to happen to you? Would you still be able to meet your obligations? What if:
- You or your spouse are laid off or fired? Most people think it cannot happen to them, but millions of people lose their jobs every year.
- You have an accident and are temporarily or permanently disabled? No one likes to think about such things, but it does happen. If you or your spouse become disabled and are unable to work, even temporarily, could you still make all of your payments?
- Someone becomes severely ill? Again, this is something we do not like to consider. Still, if you, or your spouse becomes severely ill, could you still afford your current lifestyle? What if you are unable to work? What about the cost of medical care that may be necessary?
- Other unexpected expenses occur? With suddenly skyrocketing gas prices and inflation in food on living expenses, many people are experiencing financial troubles right now. What if other unexpected expenses occur? Many people consolidate their debt because money is tight, but if you are already close to the edge, it will not take much to push you over. One unexpected expense or a rise in living expenses could be too much for you to handle.
These are just some of the things you will want to consider before using your home equity to pay off your unsecured debts. Still, using your home equity as a means of unsecured credit card debt consolidation can be the right choice for some, provided you carefully evaluate your situation.
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