The single payments, lower interest rates, and even potential tax breaks of a home equity loan can be an irresistible way to pay off credit card debt and other accounts. Before beginning debt consolidation, however, you must understand the dark side of this process. Are you aware of these hidden disadvantages of using home loans to get out of debt?
- Can you afford to repay your debt? If you skip a few payments on your residence-based consolidation loan, you risk losing your home. When answering the question of what monthly payment you can afford, never count on a “sure thing” that may not occur. Do not expect your annual bonus, tax refund, or next big promotion to save you. Instead, realistically answer the question based on your current circumstances.
- How will a home equity loan affect your bankruptcy discharge later? While few people dream of declaring bankruptcy, the possibility of a future bankruptcy discharge is entirely real. You must understand how a home equity consolidation loan can change the outcome. For example, your options may be limited because you converted your unsecured debt into secured debt, backed by the collateral of your home. You will also be restricted in your ability to use debt settlement and bankruptcy to relieve your financial distress.
- Will a consolidation loan fix the problem? Just like individuals who jump between balance transfer offers, people who consolidate their bills with a home equity loan often find themselves in the same situation just a few years later. Without experiencing a true reduction in debt and changing spending patterns, candidates for home consolidation loans can just be delaying the awful truth–that they owe much more than they could ever afford to repay.
In many cases, a debt settlement program may be a better choice. It still allows you to pay off credit card debt , but it also forces you to control your actions and avoid slipping into the same negative behaviors. Payments become affordable, and you can still pursue bankruptcy if necessary. While consolidating debt into your home can be appealing, sometimes it causes more damage than relief.