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.
