Having debts in collections is one of the most demoralizing financial experiences a person can go through, and anyone who has had this experience will be familiar with the feeling of profound hopelessness that comes when you’re caught in a debt spiral and there seems to be no way out.
When debts have gone unpaid for months on end, the regular reminders from the credit card company turn into aggressive phone calls from debt collection agencies.
These calls go to your home phone at first, but if you’re unable to pay the agency may start reaching out to your friends, family or employer — adding embarrassment and anxiety about your employment status to the mix.Â
The good news is that if you own a home, there are ways to put these debts to rest permanently, even if you aren’t finished paying off your mortgage. In this article, we’ll explore the most common one: a home equity loan from a mortgage brokerage.
What is a Home Equity Loan?
A home equity loan is a financial instrument that allows you to turn the capital you’ve built up by purchasing a house into a cash loan you can use to clear yourself of debts.
After years of paying off your mortgage (a period in which your property value has likely increased overall), you have created an asset you can use as collateral against a loan. Because the debt is secured, you can borrow against it at a comparatively low interest rate.
There are many ways to secure a home equity loan, but the easiest and fastest way to free up the funds you need is by getting in touch with a mortgage brokerage like burkefinancial.ca that specializes in residential clients. The application can be completed in minutes, and, in some cases, you can have the money in your bank account within two business days.
How can a Home Equity Loan Help Pay Off Debt?
In most cases where an account goes into collections, its due to high-interest unsecured debt from credit cards or payday loans. Because of its high-interest rate, it can be very difficult to retire this debt if surprise expenses or reduced income derail your financial plan.
Taking out a home equity loan to pay off this debt is one of the best ways to get back on track. Because it allows you to take advantage of the lower interest rates that come with secured loans.
While some may resist the idea that taking out a loan against your biggest asset is the best way to deal with credit card debt, there are a few things to keep in mind:
- Credit reports show collections records, so dealing with this kind of toxic debt as soon as possible will help you from doing long-term damage to your rating.
- Mortgage brokerages can help you find a bank or lender who can offer you good terms, even if your credit rating is below 650.
- Current interest rates are still highly favorable, so you’re likely to be paying a much lower rate on any loan you take out this year.
Pragmatic financial planning is all about being smart about when and how you will go into debt. But when an economic recession comes along, as it did in 2020, even the best-laid plans can quickly unravel, and it is necessary to take on large amounts of debt just to stay afloat.
If this is the situation you are in, remember that using your home as a strategic asset is one option that can help you get back on track as soon as possible.