Are there downsides to using a HELOC for debt consolidation?

The right strategy makes a big difference when paying off debt. If you have multiple debts, consolidating could help you save on interest and streamline your finances with fewer monthly payments. For homeowners, a HELOC is a popular way to consolidate debt.

HELOCs have their pros and cons. While a HELOC could work well for debt consolidation, it’s good to understand the potential downsides before you get one.

A HELOC uses your home as collateral

Home equity loans and HELOCs are mortgages. Mortgages are secured loans, meaning debt with collateral attached. When you borrow against your home equity, your home provides security on the loan. If you don’t repay the loan, the lender has the right to foreclose on the home and sell it to recover their losses. 

The fact that your home serves as collateral has an important benefit. Interest rates on HELOCs are usually some of the most competitive that you’ll find when you start comparing borrowing options. The collateral lowers the risk for the lender, so they can offer a lower rate.

This downside only comes into play if you have trouble paying your HELOC. But many HELOCs have flexible terms ranging from 10 to 30 years. If you need a smaller monthly payment, you could choose a longer term.

Bankruptcy is no longer an option with a HELOC

If you need legal protection from your creditors, bankruptcy is one way to deal with your unsecured debt. Credit card debt, medical loans, and personal loan debt are candidates for bankruptcy, but HELOCs are not. 

When you pay off unsecured debt with a HELOC, you’ve turned it into secured debt. You can’t discharge a HELOC in bankruptcy, at least not without losing your home. 

Most people don’t file for bankruptcy, though. In 2024, there were 494,201 non-business bankruptcy filings, according to U.S. Courts data. Bankruptcy is a financial option that a very small portion of debtors use.

If bankruptcy is an even remotely possible option in your future, then debt consolidation with a HELOC probably isn’t a good fit for your situation. You’re better off researching other solutions for your debt. But if you’re confident you can handle your debt without bankruptcy, then a HELOC could help.

You could go deeper into debt after a HELOC if you’re not careful

If you use a HELOC to pay off credit card debt, you’ll have more spending power on those cards again. For example, imagine you get a HELOC and use it to pay $5,000 toward a credit card. The payment would free up $5,000 in credit that you could use.

But you still have the same amount of debt as before. Debt consolidation moves debt—it doesn’t reduce debt. If you charge that credit card back up after using the HELOC to pay it down, you’ll have even more debt than before, because you also have the HELOC to pay back.

After you consolidate debt, you may want to stop using your credit cards altogether or even close them. Closing credit cards can affect your credit score, but if it helps you stay out of debt, that could be a trade worth making.

Traditional HELOCs have variable rates

The cost of a traditional HELOC can be unpredictable, because they usually have variable interest rates. A variable rate means the interest rate can increase or decrease from month to month. If interest rates are on the rise, then the interest charges and monthly payment on your HELOC could go up, too.

To be fair, the opposite could also happen. If interest rates drop, then a variable rate may work to your benefit, as your HELOC could get cheaper. 

But a fixed interest rate makes financial planning easier, since the terms of your line of credit aren’t going to change. Fixed rates are also generally safer, as long as you can afford the payment. You’re not at risk of your HELOC getting more expensive.

Even though variable-rate HELOCs are most common, they aren’t the only option. At Achieve Loans, we only offer fixed-rate HELOCs.

Benefits of debt consolidation with a HELOC

We’ve gone over the possible drawbacks. Here are the ways you could benefit from using a HELOC for debt consolidation:

• Get a lower interest rate. Your HELOC could have a lower rate than what you’re currently paying on your debt. If you have high-interest credit card or payday loan debt, a HELOC rate may be much cheaper.

• Lower your monthly payments. You might have a smaller monthly payment with a HELOC than you previously had on your monthly debt payments.

• Choose terms that work for you. Most HELOCs have multiple term options, so you can pick one that fits your financial situation.

If you’d like to consolidate your debt, Achieve Loans offers fixed-rate HELOCs up to $300,000 and 10-, 15-, 20-, and 30-year terms. The application process takes just a few minutes, and loans could be funded as soon as 10 days. Apply online or call 1-833-418-3231 to talk to a mortgage advisor today.