Limits tighten on use of home equity credit

Max Heine

Many of you homeowners have a home equity line of credit. Smart operators avoid getting overextended on this, since it puts their homes at risk. Milking this convenient cash cow to run your operation also is not the best idea because the trucking world is risky and you could be stuck with huge debt you hadn’t planned on.

If you’re among those using your equity line heavily for any purpose, be warned – if you haven’t already received a letter – that these lending instruments have not escaped the nation’s credit problems. Home equity lines are more difficult to establish, and lenders are tightening the reins on existing loans by lowering the credit limit or even freezing the line of credit.

The risk of losing a home is balanced by two big advantages of equity lines, notes Chris Brady, whose Commercial Motor Vehicle Consulting does the annual Overdrive Market Behavior Report:

  • The interest paid on the loan is tax-deductible because it’s another form of home mortgage interest.
  • Interest rates are several percentage points lower than those of credit cards.

Another slight advantage can be apparent at tax time, says owner-operator accountant Gary Aitken of Indianapolis. Someone using the credit line exclusively on business can list it under Schedule C (the business tax form) instead of Schedule A (the itemized deductions for personal income taxes). “It’s lowering your net profit, so ultimately you’re not paying self-employment tax on that portion of your net profit,” Aitken says.

Aitken says he hasn’t noticed clients going too far out on a limb with equity lines, but that doesn’t mean some don’t have debt problems. “They get overextended on credit cards before anything,” he says. One in nine of those sinking deep in credit card muck tries to get free by rolling that debt into a lower-interest home equity line, according to Overdrive research.

Not a bad idea. Just make sure your total debt doesn’t get too high for the size of your operation. If you want to be among the half of owner-operators with the best debt picture, your ratio of business debt to revenue should be 20 percent or less, according to the 2007 Overdrive Market Behavior Report – though it can be somewhat higher if your truck loan is large and relatively new.


How to respond
No one lender holds all the cards. If your home equity line has been frozen or unacceptably restricted, consider these recommendations from Bankrate.com, a consumer finance and advice site:

APPEAL THE DECISION. The lender’s action might have been a blanket decision affecting many borrowers, but a good credit record on your part might qualify for an exception.

TRY ANOTHER LENDER. Some have been hit harder than others by the credit market chaos, depending upon their loan portfolios, and have to take more drastic action.

INCREASE EMERGENCY SAVINGS. Better to save, earning money on interest, than to borrow and pay interest fees to the lender. Ideally, a home equity line of credit is a tool for true emergencies, not a crutch for managing your business or personal finances day to day.

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