When Does It Make Sense to Consolidate Debt with a HELOC?

American consumers had an average $104,215 in debt spread across multiple loans in the third quarter of 2023, with $23,792 in auto loans and $6,501 in credit card debts[1].

“Money management is so important”, said Alexis Stier, Consumer Lending Manager, VP at Old National Bank. “We see a lot of borrowers who struggle with this. What do they owe? When do they owe it? They miss a payment, their payment is late, or they overdraw their account. The simplicity of having fewer payments to worry about — particularly with inflation as high as it is — is very appealing.”

That’s where debt consolidation comes in. By combining multiple debts with one single loan — and with one single monthly payment — the opportunity to fall behind on payments becomes less likely. “We’ve actually seen a large volume of debt consolidation using a home equity line of credit over the last two years,” said Kathleen Dembinski, Solutions Center Manager, with Old National Bank. “People are stretched thin. And especially with credit card debt, people are often making minimum payments, which isn't actually paying down the debt at all. With HELOC debt consolidation, you can pay down your credit card debt by making principal and interest payments, not just servicing it.”

It's important to factor in all of the details before diving into any type of loan. Here are a few things to think about if a HELOC for debt consolidation sounds promising for your needs.

What is HELOC debt consolidation?

If you’re not already familiar with a HELOC, this revolving line of credit allows you to tap into your existing home equity to borrow money for whatever you might need.

Borrowing against the equity in your home to consolidate and pay off several debts may allow you to pay less in overall interest, depending on the interest on your current accounts. This is particularly true when compared to products like credit cards, which had an average APR of 27.62% as of August 19, 2024[2].

What are the benefits of using a HELOC for debt consolidation?

Having a conversation with your trusted lender ahead of time to understand if a HELOC is the best option for your debt consolidation is critical, said Dembinski. “We’ve had people who needed to pay debt off, but who also wanted to make some home improvements to their current home,” she said.  “They can take out a home equity loan to consolidate their debt, and then followed that with a home equity line of credit for their home improvement. Whatever the client's needs are, we always try to find the best solution that tailors to them, specifically.”

Some benefits of using a HELOC for debt consolidation might include:

• Ease of payments: Consolidating multiple debts into one loan allows you to keep better track of what you owe. This means you're more likely to avoid late payments and late payment fees. Making more on-time payments can also help boost your credit score. The HELOC gives the borrower the flexibility of the monthly payment, choosing the required interest only or applying extra to prinipal to pay down the balance.  
  
  
• Interest rates: Again, you’ll need to track down all your current loan information and research the actual numbers, but moving all of your high-interest debt to one loan with a lower variable rate HELOC, attached to Prime, could help you lower your monthly payments, thereby freeing up more space in your budget for other essentials that may have become more costly recently, like groceries. 
  
  
• Flexibility: Since your HELOC is a revolving line of credit, you may have more money left over from which to borrow for further financial goals, whether that’s finally upgrading your kitchen or getting that new car you’ve been needing.

What additional considerations should I make before taking out a HELOC for debt consolidation?

Debt consolidation with a HELOC should be done with eyes wide open, and a full understanding of how the product works, said Stier. “At Old National Bank, we try to educate our customers on all the options, whether that’s a HELOC or another type of loan.”

For example, a HELOC is a variable rate loan, so it’s important to keep in mind that the interest you pay may go up over time. It also does still require a minimum monthly payment that should be paid on time to avoid incurring fees. The minimum HELOC payment is interest only. Keep in mind that additional principal payments are required to pay down the outstanding balance.

If you’ve decided that a HELOC will help you save money on high-interest debts and keep better track of multiple loans, the process is fairly straightforward, and can even be done online. Remember that a HELOC is a mortgage, so you’ll go through all the same paperwork that you needed for your original mortgage. With that in mind, Dembinski recommends homeowners give them a call at least four weeks before they’d like the funds. Find out more or reach out to a loan officer today to get started.