The Home Equity Line of Credit (HELOC) is considered to be one of the more preferable types of debt. With its lower interest rates and selective criteria for approval, it can seem like the wiser way to use credit. However, due to its guilt-free nature it can also be one of the most dangerous types of credit. Before you know it, your mortgage payments are going up at renewal time instead of down. Credit Canada credit counsellors often see HELOC use both good and bad.
Here are three questions to ask yourself before dipping into your HELOC.
-
Can you afford the interest payments?
Once you start using your HELOC, you will need to pay at least the interest on it each month. The low interest rates may make borrowing from your HELOC seem innocent enough. However because people tend to use their HELOC for major purchases, such as home renovation projects or a child’s wedding, they usually borrow thousands of dollars at a time. Therefore, the new monthly payments can end up being quite high, sometimes even in hundreds of dollars! This leaves little room to put additional funds to pay off the debt itself. You could end up paying interest on this debt for possibly years to come. If you still have not paid it back by the time your mortgage comes up for renewal, it may be rolled into your mortgage resulting in higher mortgage payments. Not very progressive.
-
Is the purchase worth the cost plus interest?
When making a purchase using your HELOC, consider whether the purchase is worth its original cost plus many years worth of interest payments. If you have a leaky roof that needs to be fixed right away, your HELOC could be a lifesaver. However if you absolutely must have kitchen granite counter tops, ask yourself if they're worth their quoted price, plus a few hundred more in interest. It might be better to take your money and put it into a savings account to fund your dream kitchen and add to any debt problems.
-
Is there a cheaper way to finance your purchase?
The convenience and availability of the HELOC makes it a popular choice for covering major expenses. However there may be cheaper alternatives out there for buying a bigger family vehicle or repairing your home. For example, many car dealerships will offer 0% or low interest financing if you have good credit. Some people will be able to get a loan from their parents to make repairs to their home. Evaluate all your options before deciding whether your HELOC is the best source of financing for your expense.
A Home Equity Line of Credit can be a good thing to have in case of an emergency, such as unemployment or the sudden death of a family member. Just be sure to use it sparingly and with plans to repay it as soon as possible. Your HELOC may have a low interest rate, but remember it is secured to your home, so if you ever fall behind on payments you will be putting your home at risk too.
Frequently Asked Questions
Have a question? We are here to help.
What is a Debt Consolidation Program?
A Debt Consolidation Program (DCP) is an arrangement made between your creditors and a non-profit credit counselling agency. Working with a reputable, non-profit credit counselling agency means a certified Credit Counsellor will negotiate with your creditors on your behalf to drop the interest on your unsecured debts, while also rounding up all your unsecured debts into a single, lower monthly payment. In Canada’s provinces, such as Ontario, these debt payment programs lead to faster debt relief!
Can I enter a Debt Consolidation Program with bad credit?
Yes, you can sign up for a DCP even if you have bad credit. Your credit score will not impact your ability to get debt help through a DCP. Bad credit can, however, impact your ability to get a debt consolidation loan.
Do I have to give up my credit cards in a Debt Consolidation Program?
Will Debt Consolidation hurt my credit score?
Most people entering a DCP already have a low credit score. While a DCP could lower your credit score at first, in the long run, if you keep up with the program and make your monthly payments on time as agreed, your credit score will eventually improve.
Can you get out of a Debt Consolidation Program?
Anyone who signs up for a DCP must sign an agreement; however, it's completely voluntary and any time a client wants to leave the Program they can. Once a client has left the Program, they will have to deal with their creditors and collectors directly, and if their Counsellor negotiated interest relief and lower monthly payments, in most cases, these would no longer be an option for the client.
