Question by Alaina: Debt Consolidation vs. HELOC?
I’m currently having some debt issues, who isn’t. I owe 10k total in about 8 credit cards. 4 of the accounts are in a settlement program. I’d like to pay them off ASAP. I’m really lucky in that my dad has offered to help me (he’s 55, already has a house and a card, doesn’t really NEED credit and doesn’t mind helping). Our first option is for him to loan me the $ 4k for the 4 accounts I have in settlement to get that over with. He would probably put them on a low APR card that he has and I would pay off that card, as well as my remaining accts that aren’t in the settlement. Another option would be to do a HELOC. I would co-sign a small one…about $ 40K and pay off my full $ 10k, his $ 20k and have some extra for home improvements. He’s got a good amount of equity in the house. Any thoughts or other suggestions?
It’s not that he’s broke either. One thing that I haven’t made clear is that these are cards that I intend on paying off and then closing. Apparently it looks as though I’m trying to pay these off to rack them back up. That’s not the case here. It’s as simple as if we don’t consolidate everything somehow, nothing will ever be paid off. We have debt….that doesn’t make us low life’s. We both work full time; I’m going back to school in the fall on top of working full time. I’m young and I made a mistake. It happens to most people. If you are here to comment on my question by telling me that I’m an idiot for making an attempt to fix all of this, please save your breath. I was just asking for friendly advice, not criticism.
Best answer:
Answer by Firebird
Sounds like he’s as broke as you are. Plus, you’re asking if you two broke people should borrow $ 20k extra and blow the money. The answer to that is obviously no. If you like being poor, then that kind of behavior would certainly help keep you down.
The most important suggestion is deal with the source of the problem. This stuff you’re talking about is symptoms. The disease is spending. If you don’t cure the disease (and it’s obvious you haven’t), you’ll just run the cards up again, and you’ll have new debt, plus old debt, plus the blown $ 20,000 extra. Smart? Nope.
HELOCs are generally cheap, but he could roll a balance around on 0% interest credit card offers if he had good credit. Certainly you want to get it as cheap as you can.
That does not include credit cards. Not ever. You need to convince yourself that borrowing money on a credit card is insane. The reason, of course, is that the interest rates are unreasonable. If you eat a hamburger today, and 4 years from now you’re making payments on that hamburger at 20% interest, then that’s one of those definitions of insanity. You need to never, ever pay any interest to them. Go hungry, don’t pay your light bill, and don’t pay your phone bill, but you pay that credit card bill. That is NOT a proper source of borrowing.
P.S. I’m not insane, so I don’t have any debt problems. If I borrow money, I figure I’ll have to pay it back, so I act accordingly. That’s a definition of sanity, I think.
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If you are willing to use the house as collateral, you may want to inquire about an installment loan instead of a HELOC. Helocs are great in that you only pay the interest as long as you are in your draw period (aka happy time) but most Helocs are not fixed rates. Variable interest rates are not very popular anymore. Plus, you would essentially be using up a very large portion of your credit line up front and this is not to your advantage either. At least with an installment loan, you know exactly what your repayment amount will be and you can lock in the rate now when rates are low.
Either way, speak to your Financial Service Representative at your local bank and after viewing your entire financial portfolio, they should guide you in the right direction.
Here is a rule of thumb…Never use a debt to pay another debt.
I know how you are thinking in regards to lower interest and so on but you also have to think about the fees you may be charged. In any case, it is best to talk to your credit card companies and ask them to lower your interest rate.
You also have to think that you are putting an asset (the house) as a collateral for the debt, when you have an unsecured debt (credit card). If anything…and I mean ANYTHING should go wrong, you may end up losing the house.
Leave your unsecured debts, unsecured. Don’t risk your home just because of a lower interest. Today’s economy is WAY too crazy to risk anything.
Just my two cents. I hope you understood what I wrote. Good Luck!