There is a common misconception that having a poor credit history all but ends the chances of securing a loan, especially a large loan. The truth is that there are plenty of options to turn to if traditional lenders refuse a give the thumbs up. One of them is a home equity loan, with bad credit something that need not spoil the plan.
The basic idea is that the equity on a home serves as security, and as far as lenders are concerned, any form of viable security translates to an increased chance of approval. But there are, of course, risks that come with providing equity as collateral and these have to be taken into account.
The benefits of taking on a home equity loan are clear, allowing a large sum to be secured in order to clear other pressing debts. But there are small details to consider.
What is an Equity Loan?
Understanding what exactly is in store when taking on this kind of loan is important. There is little doubt that securing a home equity loan with bad credit can raise the funds necessary to ease financial troubles.
Equity refers to the share of a property that is actually owned by the borrower, not the mortgage provider. For example, a $200,000 mortgage to be repaid over 30 years, will probably have seen $50,000 repaid off the principal after 7 years. Effectively, the homeowner has bought back $50,000 worth of the property - a home equity loan of up to $50,000 is possible.
What can increase the equity further is any increase in property value, so a $200,000 home could be worth $225,000 over the same period. That means the total equity available is $75,000, which means a vastly increased chance of approval when used as security.
The Risk of Using Equity
The problem is that in agreeing to take on a home equity loan with bad credit, the borrowers can be setting themselves up for further trouble. This is because any foreclosure will result in the loss of the home - which is exactly what the loan was taken out to avoid.
Knowing that the equity means an increased chance of approval is fine, but as with every loan, it is necessary to take factors like interest rates and other terms into account before agreeing anything. When low credit scores feature in the equation, the interest rate is higher than normal, and monthly repayments are high higher too.
A home equity loan is a way to turn funds tied up on a home into actual cash, but never forget that it carries with it no shortage of risks too. Therefore, calculations need to be accurate. The only way such a deal makes sense is if the money is used to clear existing debts, and the repayments are lowered.
Why Lenders Will Approval
No matter what way it is looked at, a lender is taking on a certain risk in approving home equity loans with bad credit. But when the set criteria is met, lenders can find it hard to justify rejecting the extra business.
And that is an underlining factor. An increased chance of approval may come from proving sufficient income and better debt management, but lenders ultimately want to do business with the applicants. After all, they cannot make their own profits if they do not lend money.
And since home equity loans are amongst the safer types of loans for them, applicant expectations of rejection are not well founded.