Two financial phenomena have taken place in the UK over the last decade. On the one hand, we have increasingly become a nation of debtors, racking up trillions of pounds in short-term debt. On the other hand, home values have increased exponentially during this period and many of us now have massive amounts of equity value built into our homes. It may seem natural, therefore, to use the income of one to pay off the debts of the other. However, using a home equity line of credit (HELOC) may not be the best debt consolidation method available to you.
What is a HELOC?
Essentially, HELOC is exactly what it says it is. As a homeowner, you have one asset: your home. As UK house prices have risen dramatically over the last decade, many of us have positive equity in our homes. To pay off outstanding debt, you can release some of this equity with a loan, against which you provide security: your home. You have now just completed a HELOC.
Why is this a good way to consolidate my UK credit card debt?
Many see HELOC as a good way to consolidate their UK credit card debt because, as a secured debt, the interest rate on the loan is much lower than the interest rate they are currently paying on their card debt. existing outstanding unsecured credit. In addition, the repayment terms of the consolidated debt may be more affordable, that is, the monthly repayments may be lower.
Why is this a bad way to consolidate my UK credit card debt?
Basically, there are two main reasons why HELOC can be considered a bad way to consolidate your debt. On the one hand, and very importantly, if you choose to consolidate your debt through a HELOC, you should keep in mind that you are literally gambling with your house. If you don’t make payments on the line of credit provided to you, such as a secured loan, you may lose your home. Consequently, this can be seen as an extremely risky way to pay off an unsecured debt, against which a claim against your biggest asset, your home, would be much more remote.
The second reason HELOC isn’t seen as a particularly good way to consolidate credit card debt is because, unlike in the past, there are now other alternative methods that credit card borrowers can use to try to consolidate and pay off your credit card debt. . Examples of this may be unsecured personal loans or even 0% interest offered as a promotional incentive to transfer your credit card balance to another UK credit card provider. In short, HELOCs are considered an extreme measure for a short-term problem.
Having said that there are two main reasons why HELOC is seen as a bad way to consolidate credit card debt, there is actually a third reason. In most cases, credit card borrowers use HELOCs as a short-term measure to consolidate their credit card debt. Most credit card borrowers who consolidate their debt with HELOC financing don’t cut off their credit cards, but soon after, the credit card borrower will have built up another line of credit against their credit card. To pay off this line of credit, the homeowner will take out another line of credit against the residual equity in their home. Before long, the house no longer has any residual equity, the owner has a number of loans to pay off, and another line of credit remains outstanding on his UK credit card. This kind of financial mismanagement is all too easy to do today, but it’s a key coffin to your long-term financial future, so think carefully before using a HELOC to consolidate your UK credit card debt.
