Every loan applicant would love to secure a large loan to clear all their financial headache in one go. The problem is in finding the collateral needed to secure the deal. But homeowners have easy access to ample security to secure home equity loans, for bad credit borrowers to solve their financial problems.
The fact that home equity is the share of home value that is independent of the mortgage means that it is a ready source of security. What is more, it is usually sufficient to secure loans of $75,000 and more, and is highly prized by lenders. And because of its popularity, applicants can enjoy low interest loans too.
These home equity loans are considered perfect for bad credit financing, satisfying the demands of both lenders and borrowers. But there are some factors that need to be considered before applying for one.
Equity And How It Works
There is little mystery over the worth of a home equity loan for bad credit borrowers, with the chance to secure a very large loan a rarity without home equity as security. The fact that a segment of property value can be convert into cash when needed, rather than when possible, means that mounting debts can be cleared at almost any time.
For those unsure, equity is to the value of a property that is not covered by the mortgage, and is, therefore, owned by the mortgage holder. The equity on a home is increased every time a mortgage payment is made each month. Each payment effectively buys another share of the house value by lowering the mortgage balance and the amount owed to the lenders.
But since a share is owned by the borrower, it can be used as security in any loan deal. And with the risk factor lessened dramatically, low interest loans become attainable. So, borrowers can afford to seek very large home equity loans as long as the equity is sufficient and the repayments are low enough.
Why Equity Is So Popular
Equity is arguably the favorite form of security amongst lenders for a number of reasons, but chiefly because of its long-term stability. Equity does not depreciate over time, as items of collateral can do, so a home equity loan, for bad credit borrowers especially, is the most influential security option around.
In fact, equity is extremely reliable, with it growing every time a mortgage repayment is made and the market value increases. After 10 years, for example, the equity on a $200,000 home could increase from $20,000 (10% down payment) to $90,000 (plus 120 repayments). If the property value increased by 25% over the same period, a further $50,000 can be added, making a total of $140,000.
But they practically ensure that low interest loans are secured because the value of the equity can never depreciate. While a car may lose as much as 50% of its value over 3 years, a $75,000 home equity loan will always have security worth $75,000.
Why Low Credit Scores Are No Problem
There is no doubt there are real benefits in a home equity loan for bad credit borrowers. But it would be a mistake to think that low credit ratings are completely ignored. It is not incorrect to view these loans are potentially low interest loans, but lenders will still adjust interest rates upwards when credit scores are very low.
However, it is also true that these higher rates are significantly lower than would normally be charged by traditional lenders. After all, the power of home equity is that lenders face significantly less risk than normal. With this in mind, a home equity loan is the most affordable loan option out there for bad credit borrowers.