Is It Wise To Use a Home Equity Loan For General Living Expenses?
In our most recent online poll we asked, “Is it wise to use a home equity loan for general living expenses?” The majority of respondents said “no,” and we would agree. Using a home equity loan for general living expenses creates an opportunity for you to spend more than you earn. We call this ‘living beyond your means.’ This is something we would advise against doing because it can:
- Prohibit you from accumulating wealth
- Prevent you from building a nest egg for retirement
It can also create a situation where the amount of debt you accumulate is greater than your ability to pay it. This is especially dangerous if you run into a financial situation or hardship, such as the loss of a job.
Because a home equity loan is secured by the equity in your home, if you fail to make payments you could ultimately lose your home.
The primary purpose of credit is to purchase items that you may have difficulty saving enough cash to purchase. In the case of a home equity loan this may include:
- Home improvement projects
- A new car, or recreational vehicle
- A college education
As part of approving applications for a home equity loan or line a bank evaluates a customers ability to repay. If the bank approves the application it is because they have confidence that the customer is able to repay the loan. However, it is ultimately up to the customer to use credit wisely and make sure that they are not taking out more than they can pay back.