It seems every other day one can open a national newspaper these days and read about someone decrying the state of the average Canadian. The experts tell us we are so far in debt that we may never climb out and that this should be more than enough to scare us straight. It likely won’t be of course, because we are addicted to debt. “Live for the moment because you deserve it!” Isn’t that what targeted advertising campaigns preach to us endlessly? The fact is that not all debt is created equal, and I actually wish that I was 151% of my yearly income in debt, (I think I am roughly 170% in debt… but cut me some slack, I’m in my mid-twenties and own a house) as long as it was the right kind of debt.
Join The Debt Consolidation Party!
I’m constantly amazed by the social acceptance that goes along with consumer debt these days. People have taken to unlocking the equity in their house at unprecedented rates. The mechanism that allows us to do this so easily is known as a Home Equity Line of Credit or HELOC. Every big bank makes sure to feature this borrowing vehicle prominently in their ads because it is a fantastic deal for them. They get to lend money, and it is backed up by the solid value of a house; furthermore, the house is already an asset that the bank is making money on since you likely borrowed the original capital to purchase it from the very same bank. The bank made money on you paying it off the first time, and now they will make money on the same asset yet again!
HELOCs seem to be the magic elixir that is prescribed to fix all financial ills these days. Pesky credit card debt? A little HELOC for that. Stubborn car loans at a high interest rate that just won’t die. Mix a little HELOC every night before bed. It has not only become acceptable to use a HELOC to fund lifestyle inflation, it is actually routinely called “expert advice” and our nice financially-savvy term for it is “consolidating your debt at the lowest interest rate.” While this is not technically bad advice (once you have the debt, it is actually quite logical), but the fact that it is so widespread actually encourages the original sort of behaviour. Instead, maybe we should focus on not getting into that position in the first place a little more! Did you really need two new vehicles? Maybe you didn’t need that large detached house that you’re now so quick to borrow against (along with the crippling payments, and mounds of interest that went with it)? Continue reading HELOC For Consumption vs Investment