The demand for debt consolidation continues to soar and home equity loans are helping homeowners consolidate credit debt effectively in 2024. Banks and mortgage lenders have expanded their home equity loan programs this year in an effort to meet the growing demands of consolidating compounded interest from credit card debt and high interest unsecured loans.
Can I Use a Home Equity Loan or HELOC to Consolidate Debt?
Yes, using a home equity loan or HELOC for debt consolidation can be an effective strategy. Typically, these loans offer lower interest rates and longer repayment terms compared to high-interest debt like credit cards. This means that consolidating your debt with a home equity loan or HELOC can reduce your monthly payments, making it easier to manage your budget. If you’re working with a tight monthly budget, the savings from lower payments could provide the financial relief you need to help you get out of debt more efficiently.
How Secured Home Equity Debt Consolidation Loans Work
By the third quarter of last year, American consumer debt reached $16 trillion, which was an increase of 2.2% from earlier that year. This rise in consumer debt has caused many Americans to look for other ways to manage their debt.
Some Americans have been looking closely at a home equity debt consolidation loan to save money.
A debt consolidation loan combines at least two debts into one larger debt.
This loan is often used to replace credit cards, auto loans, and student loans. Then the borrower only need to pay one loan payment per month at a lower rate.
4 Top Reasons to Use Home Equity Loans for Debt Consolidation
Let’s explore the four top reasons to take out a debt consolidation loan with your home equity:
Paying Off Debt Faster
Taking out one of these loans can help you pay off debt faster, especially when you have a lot of credit card debt. The problem with credit cards is they lack a timeline to pay them off. If you continue to use them, you always have credit card debt and usually at a high interest rate.
On the other hand, a debt consolidation loan has fixed monthly payments for a certain period. The sooner your debt is paid off, the sooner you can put your money into more useful things, such as investments, retirement savings, or an emergency fund. Many homeowners will refinance a HELOC or equity loan while increasing the loan amount to consolidate other consumer debts like credit cards.
Lower Interest Rates
As of the beginning of 2023, the typical credit card rate is 20%, while the typical personal loan rate is 11%. While the rates depend on your credit score, term length, and loan amount, you still will probably get a lower rate than with a credit card. Refinance a home equity loan or HELOC if you can lower the interest rate and monthly payment. However, if you have mediocre credit, you will have difficulty getting a debt consolidation loan with your home equity. Consider a bad credit home equity loan if you have credit scores below 600.
Fixed Schedule for Paying Off Debt
If you get a debt consolidation loan, you know what you need to pay every month and when the final payment is. If you were to just pay the minimum on a credit card, it could take years to pay it off.
Increases Credit Score
Getting a debt consolidation loan may lower your credit score at first because of the hard credit inquiry, it will probably boost your score over time. This is because you will be making on-time payments more easily. Payment history is about 35% of your credit score, so paying a debt consolidation loan payment on time can raise your score.
Also, if your old debt was on credit cards and the cards are left open, your credit utilization rate will improve. How much you owe accounts for 30% of the credit score and length of credit history is 15%. If you close your cards after paying them off, it can lower your score.
Alternatives Ways to Consolidate Debt
A debt consolidation loan may give you a lower interest rate and the ability to have your debt paid off by a certain time. But if you cannot qualify for a debt consolidation loan, there are other options to consider in the meantime.
First, a strategy that many people do not try is to simply call the credit card company and see if you can get a lower rate. There is no guarantee the company will do so, but they will consider it possibly if you have been on time with your payments.
Second, you can look into a balance transfer. Some new credit cards have a 0% introductory rate that can last up to 18 months. This will give you some time to pay down your debt without interest rates. But you can only transfer up to your credit limit. Also, note that if you do not pay off the debt by the end of the introductory period, your interest rate will go up.
Third, if you do not get a debt consolidation loan and continue with your credit cards, there are ways to deal with the debts. One way is the make the minimum payments on your credit cards and put more money into repaying the debt with the highest interest rate. This strategy allows you to pay less interest than you otherwise would.
Another way is to make the minimum payments and put more money into paying off the lowest balance first. Every debt that you pay off allows you to not pay that minimum payment anymore. That money can be used to help you pay off the next debt.
However you work to manage your debt, remember that with most consumer spending, you do not get anything in return for paying that debt. Whatever you bought with the debt that you didn’t pay off, it probably cost you much more because of the interest. If you get a debt consolidation loan, remember to practice better budgeting and spending habits so you do not get into the same situation again.
An equity debt consolidation loan can help you to improve your budgeting by letting you pay off debt with a lower rate with one payment. Moving some or all of your credit card debt to a debt consolidation loan can usually result in a higher credit score. As you shop for a debt consolidation loan, you should look for the option with the lowest rate and fees. In the ideal situation, you can score a debt consolidation loan that can make your monthly payments drop while also saving you interest. HEM will introduce you to top banks and lenders that specialize in home equity debt consolidation loans to start saving money.