Should I use a line of credit to pay off my debts?
That’s a good question, and one that might produce some surprising answers. There’s no one size fits all solution to debt. You need to consider all your options before you take out a consolidation loan or max out your line of credit to pay off your debts. You also need to be clear on your short- and long-term financial goals.
What’s prompting the question?
If you’re considering using your line of credit to pay off your debts, it’s likely you’re facing one or both of the following scenarios:
- You currently owe a balance on a higher interest credit account (e.g. credit cards, loans, etc.) than your line of credit would charge;
- You currently owe a balance on several different credit accounts (e.g. multiple credit cards, loans, etc.) and are having trouble managing your monthly debt payments;
If that’s the case, using your line of credit to consolidate your debts can potentially:
- Reduce the amount of interest you pay on your debts (the typical line of credit charges about four times less than the typical credit card)
- Reduce stress by simplifying your finances (one monthly payment)
- Reduce the time it will take to pay off your debts
But don’t make that transfer just yet. There are some potential pitfalls you need to be aware of. And if you’re not careful, they can negatively impact your debt situation.
Secured Line of Credit
Secured lines of credit like a home equity line of credit (HELOC) often provide flexible repayment terms and high credit limits. They are fast becoming the borrowing tool of choice for debt consolidation. HELOCs can be useful, but they can also be risky — especially in unstable real estate markets.
Interest rates are usually lower for secured lines of credit because you are providing collateral to the lender. The lower interest rate comes with a catch, though, because you aren’t bound to set monthly payments and your lender could foreclose on your home if you fall too far behind.
Remember, if you cannot make payments toward your HELOC, or you make interest only payments, you will not reduce your debt. So, you may find yourself in the same situation as before you used your HELOC — or even further in debt.
You must be disciplined and consistent with your repayments if you’re going to use this option.
Unsecured Line of Credit
An unsecured line of credit typically commands higher interest rates than their secured cousins because you are not guaranteeing the loan via title to your real property. But like an unsecured line of credit, you will typically only have to make interest only payments every month.
This repayment flexibility is convenient. But it can also be troublesome if you’re not disciplined with your payments. Failing to repay the principle balance on your line of credit could prolong your timeline to becoming debt free — and it could also end up costing you the same in interest as a higher interest credit card.
If you’re going to use an unsecured line of credit to consolidate your debt, you need to have a clear repayment plan in place first.
What Are My Other Options?
Consolidating your debt can make your payments easier, but it does not reduce the overall amount you have to repay. Depending on your financial situation, it may also be difficult to obtain a line of credit or consolidation loan if you don’t currently have one.
There may be other options available to both reduce the number of payments and the total amount you to repay. Schedule a Free Confidential Consultation with a Licensed Insolvency Trustee today to learn whether these are appropriate for your unique situation.
Consumer Proposal — A Licensed Insolvency Trustee may be able to negotiate a legally binding settlement with your creditors which you could pay either as a lump sum or every month for up to five years. These payments would be interest free and based on your financial situation, ensuring they are fair, affordable, and will help you eliminate your debt.
LEARN MORE ABOUT CONSUMER PROPOSALS
Bankruptcy — This process would involve surrendering certain assets and potentially some monthly income to a Licensed Insolvency Trustee for distribution to your creditors. In exchange, your debts could be completely eliminated in as little as nine months.
At MNP, we can help you find the debt solution that fits you and your goals. Before you make any decisions, we would be happy to sit down with you and explore all of your options and ensure you make the best decision for you.
