What is Velocity Banking?
Velocity banking is a financial strategy that involves using a line of credit, typically a home equity line of credit (HELOC), to pay off debts more quickly and save on interest payments. The concept revolves around leveraging the liquidity of a line of credit to make larger payments towards debts, such as mortgages, car loans, or student loans, in order to reduce the principal balance faster.
Here's how velocity banking typically works:
- Obtain a line of credit: The first step is to secure a line of credit, often a HELOC, against the equity in your home. This provides you with a pool of funds that you can borrow against as needed.
- Use the line of credit to pay off debts: Once you have the line of credit, you use it to pay off your existing debts. This consolidates your debts into one account with potentially lower interest rates.
- Utilize your income: Instead of making regular monthly payments towards your debts, you direct your income into the line of credit, reducing the outstanding balance.
- Repeat the cycle: As you pay down the balance of the line of credit, you free up more available credit that you can use to pay down additional debts. This cycle continues, with the goal of accelerating the repayment of debts and reducing overall interest costs.
By using this strategy, individuals aim to minimize the amount of interest paid over time and pay off their debts more quickly than they would with traditional repayment methods. However, it's essential to approach velocity banking with caution and fully understand the risks involved, particularly the potential for variable interest rates on lines of credit and the need for disciplined financial management. Consulting with a financial advisor or expert before implementing velocity banking is advisable.
