Anyone with bad credit will tell you it is difficult, if not impossible, to get a traditional loan. What many don’t realize is that home equity loans are available even for those who don’t have a great credit score. The lender uses the home for collateral so he or she is less at risk of you defaulting. If you do default, the lender can foreclose on the home to get his or her money back. Although lenders determine what credit score is needed before a bad credit home equity loan will be offered, home owners do have options.
As you make payments on your home, you build up equity. Equity is nothing more than the difference between what the home is worth and how much you owe on it. For example, if your home is worth $200,000 and you owe $175,000 on it, you have $25,000 worth of equity in the home. A home equity loan allows you to borrow against this. Your home is an investment and, once you have some equity built up, you have the option of borrowing against this equity. Why is it that a lender is more willing to provide a home equity loan for those with bad credit than he or she is to offer a traditional, unsecured loan?
Unsecured is the key in the above sentence. When a loan is unsecured, the lender has no recourse if the borrower defaults. With a secured loan, such as a home equity loan, something is put up as collateral. In this case the home is used for this purpose. When the borrower doesn’t make the payments as agreed, the home equity lender comes in and begins foreclosure proceedings to recoup his or her money.
Before you start contacting lenders and applying for home equity loans, you need to determine if this is the right move for you. One thing to look at is the upfront fees you will be charged for making this move. Most lenders refer to these fees as points and each point is equal to one percent of the loan amount. Using the above example, a home equity loan of $25,000 would cost you $250 for each point you are charged. Another thing to consider is the interest rate you will be charged. With bad credit, your interest rate is likely to be higher than for those with good credit scores.
Decide what the loan will be used for. If you are using it to pay off high interest credit cards, you may find you can save a great deal by going this route. If you are using the money to pay off other debts, you may find that it extends the time needed to pay the other debts and you could end up paying more in the long run. Many lenders will help you to compare different options to see which will save you the most over the long run.
Lenders judge a borrower on his or her ability to manage debt. Your track record when it comes to paying loans on time affects the interest rate you pay. Home equity loans for bad credit are becoming more popular though as home owners look for ways to obtain funds and lenders look for ways to ensure they will be paid back.
Many home owners turn to a home equity loan when they are planning to sell. The faster a home owner pays down the principal of the loan, the more equity he or she builds up. When the time comes to sell the home, the home owner has the option of obtaining a home equity loan to cash out on the equity before moving. This may be a good option for someone who has less than perfect credit, but would like to buy a new home. The equity in the current home may be used to increase the down payment on the new home.
One thing you should do before applying for a loan of any type is to check your credit report. If there are any errors or omissions on the report, correct them before you apply for a loan. Doing so may raise your credit score and help you obtain a better interest rate. This should be done by anyone applying for a loan, not just those with bad credit. If you have any small debts showing up on the report, try to pay them off before applying also. Small steps such as this will help you to get a bad credit equity loan while allowing you to pay a lower interest rate.
Home equity loans may be used for any purpose. As the home secures the loan, lenders are more willing to work with people to provide the funds they want and need. Consider this option when determining which type of loan is best for you. Many find going this route makes a lot of sense.
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