Secured loans usually come with excellent terms, but it is still surprising that home equity loans for bad credit borrowers are so affordable. But, there is method in the madness supposedly in these lender.
There is a general expectation that loans to people with bad credit ratings come with high interest rates, but this is not actually true. Loans provided with security, such as home equity loans for bad credit borrowers come at quite low interest rates. This does seem strange given that bad credit has negative connotations, prompting lenders to cover their potential losses.
However, home equity is arguably the strongest form of security possible, and so loans applied for on the back of them are considered very safe. So, getting approval with low interest rates is no great problem, even if the applicant has a terrible credit history.
Of course, there are more benefits to seeking home equity loans than getting low interest rates. Others are improved financial status, practically guaranteed approval, and improved credit scores. But it is very important to know the conditions that affect approval and terms, if the best is to be had from these loans.
Why Equity is So Popular
Lenders have a universal high regard for equity as a form of security. It comes down to its value and the fact that, over time, it usually gains in value. So, a home equity loan, for bad credit borrowers especially, can be viewed with confidence when seeking a vital cash injection to clear up a difficult financial situation.
And it is because of this high regard that the risk associated with lending to applicants using equity as security is reckoned to be nil, making lenders happy to grant approval with low interest rates. The obvious result is that the loan is extremely affordable, which in turn reduces the chances of any repayments being missed.
It is not good only for the borrowers, however. From the point of view of the lenders, a home equity loan is highly practical, involving security no borrower wants to lose (his home), so the chances of getting their money back is extremely good.
Equity Loans Explained
The basis of a home equity loan for bad credit is pretty straightforward when the share of the home no longer covered by a mortgage is considered. Basically, as a mortgage is repaid, the balance falls while the share of equity owned by the borrower increases.
For example, a 25-year $200,000 mortgage taken out a decade ago may have seen the balance fall by $75,000 over those 10 years. This means that the equity on the home is worth $75,000, and that a maximum loan of $75,000 can be secured. If the property market increase by $25,000, that increases the equity to $100,000.
A great advantage of these loans is approval with low interest rates, making the loan highly affordable. And with monthly outgoings are reduced, cash is freed up for other bills and debts. So, this makes it even easier to get approval on home equity loans.
Are Credit Ratings Ignored?
Actually, no. But credit ratings only ever have a limited influence in the approval process. So it is not a vitally important aspect when applying for home equity loans for bad credit. Of far more importance are the security provided and loan purpose.
Usually, the purpose is to take control of (or even clear) existing debts. This is a very positive purpose and one that lenders are happy to support. What ratings are influential in deciding is the interest rate to be charged, but the security alone means that approval with low interest rates is practically guaranteed. With this in mind, it is pretty difficult to find a better loan option than a home equity loan.