Does this sound foolish? It should, but what is even more foolish is that this is the advice I heard on the radio during my drive to work this morning. One of the regional banks around here was running a commercial that was basically giving this advice. I don’t have an exact transcript, but this is basically what it said:
Need to pay for college? Use your home! Can’t afford a new car? Use your home! Paying for a wedding? Use your home! Why wait to gather up the money when you can tap into the money you already have in your home? By taking a home equity loan you can access money that is yours at an affordable rate. You may even be able to deduct the interest! Call now to find out more…
At the very end they threw in a real quick disclaimer that basically said, “only borrow what you can afford to pay back.”
Is it just me, or is this a reckless advertisement? I would expect to see this coming in the form of a spam email or a late-night infomercial, but from what I would consider a reputable bank–I’m just very surprised.
Why This is a Bad Idea
Hopefully the reasons are obvious, but if not, let’s look at some of the reasons this isn’t a good idea. First and foremost, this is taking on more debt, and in their example about paying for college, this is absolutely ridiculous. A home equity loan is going to come with fees, and probably have an interest rate that far exceeds what a student loan would be, not to mention the favorable repayment terms on a student loan.
In addition, whether the loan is used for college or whatever, it is secured by your home. We already know that we’re not in the strongest housing market, and if someone is extending themselves by taking out a home equity loan, they are increasing the likelihood of foreclosure in the event of a financial downturn.
Finally, this is simply promoting borrowing over saving. They diminish the importance of saving and tell you that your home is virtually a savings account just waiting to be tapped. This couldn’t be further from the truth and is reinforcing the buy now, pay later way of thinking that has become so prevalent.
Undermining Sound Financial Advice
Ads like these really undermine what we are trying to accomplish, and it is a shame that some banks are contributing to the problem. As a whole, we already have problems with people saving money and carrying too much debt, not to mention the whole subprime mess, yet there are still companies that will do anything to make a few extra bucks.
What I’d like to see is a bank offering some sort of reward or incentive for opening a savings account with systematic deposits. I know there are a few that offer a modest sign-up bonus, but doing something to encourage a good financial decision could in fact be more lucrative than a quick home equity loan.
A customer who begins saving is going to be a happy customer. Then, as they begin to gain control over their finances and bring more assets to the bank, they are more likely to deal with the bank for future financial needs (mortgage, credit card, business accounts, etc.). But instead of thinking long-term, it looks like they are happy churning products that aren’t suitable for a few bucks, which could eventually ruin someone’s finances and that person as a customer forever.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Nothing new, once again a small group of scammers will benefit on the lack of financial literacy of the general public. Sad, but that is how it works...
Could not agree with you more.
"Ads like these really undermine what we are trying to accomplish, and it is a shame that some banks are contributing to the problem"
My parents worked so so hard to scrimp and save in order for them to pay their mortgage, they cut back on luxuries like holidays so that they can finsih paying off their mortgage at a relatively young age and enjoy it when they do. Ads like this go against and even try to reassure consuemrs that it is ok to get in to even more debt! Should be banned if not discouraged.
Here in Canada ING direct recently had a promotion with $25,000 prizes for people who set up an automatic savings plan (regular transfers in to their ING accounts). Unfortunately I didn't qualify because I get a lot of money sent directly to my ING account - I only move it to my checking when I pay bills or want to put more in my investments.
Forget the bank, find a credit union. Credit Unions are not appreciably better with regard to the stupidity issue, but you are at least not contributing to some stupid jerk's profit.
I'm seeing the retail branches in my neighborhood in Austin becoming more aggressive with these types of ads.
I agree with Hollis, banks wouldn't haphazardly run the ad without first identifying and zeroing in on their intended market. The only thing that keeps if from being labeled a predatory practice is that they'll offer the product to everyone. The borrower truly is servant to the lender...
I still don't understand the marketing strategy because it's highly unlikely that anyone who owns their home outright will go for an equity loan for a car or college tuition when they can essentially get a low interest "home equity line of credit" from any of the major creditors. It seems this type of marketing ploy is aimed at selling people "balloon mortgages". Regardless, it will only add to the rising forclosure rates it the US. It's a sad story.
This sounds very similar to an ad that plays on the radio in GTA: San Andreas.
Except that ad was intended as satire.
The funny thing is almost every statements in the ads asking people to spend money. So if you don't have any money to spend, try to get more debts through you home equity.
Well, advertisement always like this, they are salesman and not financial expert. So their jobs are selling the home equity loan and not helping you to get out of debt. So what can we say? Just pray that not much people listen to their financial advice.
Fantastic article Jeremy, and I agree with you 100% about not incurring additional debt through a home equity loan. I own two homes that are motgage free and the only thing I'd possibly consider would br a low interest home equity line of credit if I were using it to upgrade or repair one of my homes.
The only thing I really don't understand is the marketing strategy of the bank because it's not exactly like most people who can't afford a car or college tuition have a home to borrow against??
Anyway, just wanted to say "Great Site", found you on Reddit and have subscribed to your RSS feed.
Not sure that this sort of advertising constitutes short term thinking on the bank's part. Customers whose finances are in disarray can be quite lucrative. They accept high margin products, pay lots of fees and aren't necessarily going to switch banks just because they got a raw deal.
In Calgary, where we have seen huge increases in home equity this type of advertising is rampant. I also see it with friends and colleagues - new cars, clothes, etc. It is nuts. To me this shows us how financially illiterate society is. It also speaks to an entitlement mentality - I 'need' it now and my home equity can get it for me. The banks sell what people ask for...
I don't think its a matter of financial illiteracy rather a desire to obtain luxuries one can otherwise not afford. I'm sure people know the money is borrowed and they have to pay it back, but they are in the "wow" mode. "wow, I can take a loan against my house? Now I can do this, I can do that." I think people have gotten too use to borrowing against their homes during the housing boom.
Those commercials are everywhere and the funny thing is my girlfriend, who works at a bank, says that management is telling all employees to push HELOCs this month, its like "HELOC month" or something, perhaps its a nationwide thing lol.
I wish it was as easy as that. Granted, it would help if brick and mortar banks would offer attractive rates without requiring very large balances, but I don't think that is enough.
Sadly, you throw in a free iPod Nano or a $25 gift card to Starbucks for getting any other financial product and you have people flooding through the doors to sign up. Most people just don't see the long-term value of a high interest rate, but you wave a a piece of schwag or a few bucks up front and they are all over it.
"...sort of reward or incentive for opening a savings account with systematic deposits"
Otherwise known as attractive deposit rates?