Comments on: Pay Off Credit Cards With Home Equity: Secured and Unsecured Debt

By: PT

PT — Thu, 01 Jan 1970 00:00:00 +0000

@ Glenn - Great question. I answered this in a post called: How to Prioritize Your Debts for Payoff.

By: Glenn

Glenn — Thu, 01 Jan 1970 00:00:00 +0000

What if Max had both Secured Debt (Home Equity Loans) and Unsecured Debt (Credit Cards). And assume Max is able to cover all the Minimum Payments on this debt and still has money left over at the end of each month. The question is Where should he use this extra Money? Should he use this extra money to reduce his lower interest Secured Debt or his Higher interest Unsecured Debt.
Conventional wisdome says he should pay off High Interest Debt First to reduce the amount of interest he will be paying. Which means he should pay off his Unsecured Debt First.
But is this smart considering he also has Secured Debt?

By: PT

PT — Thu, 01 Jan 1970 00:00:00 +0000

Thanks for sharing your thoughtful comment, Mike.

By: Mike Sweeney

Mike Sweeney — Thu, 01 Jan 1970 00:00:00 +0000

I agree, JD. I think it also depends on each situation and with what each person is comfortable with or not comfortable with.

To say you should never replace unsecured debt with secured debt can’t be applied across the board. If someone feels that way, that’s cool, I respect that. But it can be a very sound financial decision for other people who are ok with it.

At the same time, to say you should always replace unsecured debt with secured debt doesn’t apply across the board either. There’re always other options. I like the 0% transfer, you can’t borrow money for much cheaper than that. However, you’ve got to pay the piper at some point and once that intro period ends, you’ll need to retransfer or consider other options.

Everyone needs to weigh out their personal options and then make an informed decision based on their level of comfort.

After deciding, the reason the debt is there in the first place also needs to be addressed and corrected. (ie: overspending, lack of budget, job loss etc…), otherwise debt may continue to increase with any option.

By: PT

PT — Thu, 01 Jan 1970 00:00:00 +0000

@ JD in DFW – Thanks for stopping by and commenting. I like the way you laid that out. Your analysis says it a bit more concise than I did. Don’t ever make me go look up a word again though (…tacit).

By: JD in DFW

JD in DFW — Thu, 01 Jan 1970 00:00:00 +0000

I think a lot of people overlook the risk of losing their asset when evaluating the attractive rate of a home refiance. However, it seems that if one is committed to paying off a debt that the replacement of unsecured debt with secured debt can be a useful means of doing so. There is a tacit assumption that one may not have to repay unsecured debt, because assets cannot be take from you. I would argue that the responsible thing to do is to repay all debt and do it in a manner that is the quickest. Despite the risk, replacing unsecured debt with secured debt may be the quickest (albeit riskier) manner.

By: Ryan @ Smarter Wealth

Ryan @ Smarter Wealth — Thu, 01 Jan 1970 00:00:00 +0000

Replacing unsecured debt with secured debt is only a good move in certain situations. You need to be extremely diligent with your money and your asset needs to be pretty well covered anyway so that by replacing your unsecured debt you will not lose your asset.
You can save money on interest this way.
Having said that, if it were all maths and figures we would all be rich. The way we spend money is based on emotions, so I agree with you to not replace unsecured debt with secured debt

By: Cat

Cat — Thu, 01 Jan 1970 00:00:00 +0000

Sorry if I seemed harsh, but I think this is a mistake that too many people have made. Even in the scenario presented let’s say Max’s health or financial situation gets worse – now his house is possibly at risk. What’s worse than being sick and in debt? Sick, broke and homeless.

Thanks for the post today. At least now readers may be a little more informed when they make a decision.