There is little room for doubt as to how Dave Ramsey feels about home equity lines of credit (HELOCs), and he tends to pull no punches when it comes to expressing his views upon these lending devices. It’s certainly hard to argue with many of his points, and his extreme reaction is based in large part upon his experience in speaking with people who have encountered the darker side of these loans. Here are a few of the main points that I have taken from what Dave Ramsey has to say regarding HELOC loans and why they might not be as innocent as they seem.
1. Misunderstanding the Loan
As with almost any financial transaction, those participating in the transaction must be aware of the contract into which they are entering. Due to the financial ignorance of a large portion of American society today, we have seen the pitfalls surrounding the lack of understanding when it comes to loans as a whole. Whether it is with credit cards, mortgages, or home equity lines of credit, it appears that the vast majority of Americans just don’t get it when it comes to understanding the financial responsibilities of loaned money.
2. HELOCs Sway With the Financial Breeze
The thing about a HELOC, is that while it might seem like a great idea when the economy is trending upward and home prices are appreciating, when things on the downslide and a homeowner is underwater on their home, taking on such a loan might appear in hindsight, somewhat moronic. Their vision blocked by the rising tide of economic success, it is the homeowner’s inability to foresee the inevitable economic valleys that lie ahead, which can be the downfall of a HELOC.
Of course, we can’t just blame “Joe Public” when it comes to calamity in the financial world. Financial institutions are also to blame for many of the misunderstandings when it comes to home equity lines of credit. Shady phrasing, terminology that could stump a CPA, and adjustable rates that might seem more in line with a credit card than a home loan, are just a few of the banks’ methods of pulling the wool over the unsuspecting eyes of the average consumer when it comes to a HELOC.
I may not like big banks, and Dave Ramsey might not like HELOC loans, but it isn’t the banks who are forcing people to take out loans for things that they should be saving up to purchase. It appears that many people consider a HELOC an extra savings account to be used for their personal enjoyment purposes.
The misuse of such loans can swiftly turn to abuse. A home equity line of credit may, by some, start to be viewed as a new type of credit card, only there to promote their immediate indulgence, and avoid having to delay their childlike gratifications for any extended period of time.
6. The Carousel of Debt Consolidation
Some will use a home equity line of credit as a docking area for unrelated debt where they consolidate debt from other areas into a HELOC, just pushing the inevitable payment of such debt away to be dealt with later. Moreover, if they don’t fully understand the terms of the HELOC, they might be making a poor choice when it comes to the associated interest rate they could be facing compared to that of their previous debt.
7. Poor Saving Behavior
Being able to waylay the consequences of purchases and debt can also promote poor saving behavior. Knowing that one’s purchasing whims may be satisfied by use of a HELOC is detrimental to the common sense saving practices that once ruled the not so recent past.
8. Debt Cancer
Not only do home equity lines of credit often encourage misuse, abuse, and poor saving habits, but they may also promote taking on further debt. By using a HELOC to consolidate or pay off credit cards, one is reopening the devices that may have created the need for the HELOC in the first place. This can invite a relapse into the cancerous debt that continues to eat away at assets.
9. Credit Crunch
Rather than a safety net only to be used in the most dire of financial situations, a HELOC may instead become a crutch. Making use of a HELOC crutch might buy a homeowner time, but it may not repair the financial injuries he has suffered.
References and Further Reading
Sheyna Steiner. Bankrate.com. Ramsey: Home Equity Loans Dangerous. [Online]. 2007. http://www.bankrate.com/finance/financial-literacy/ramsey-home-equity-loans-dangerous-1.aspx
Tom Becker is a writer who blogs about managing money for a comparison website based in Australia called www.moneycompare.com.au where it’s easy to open a savings account with a high interest rate for the maximum return on your investment.