It would be easy to assume that home equity loans for bad credit borrowers can only have a high-interest rate. After all, bad credit suggests high loan risk, and charging a higher rate is how lenders minimize your potential losses. Of course, turning down a loan is possibly even better, which is what many lenders do.
But the fact is that home equity loans are different than personal loans, and especially the unsecured type. This is because home equity is used as a type of security, making it possible to obtain approval at low-interest rates regardless of the applicant’s credit history.
There are other reasons that make a home equity loan different, but there is little point in thinking that approval is guaranteed. As with all loans and financial agreements, it is important to know the conditions of an agreement.
Why Lenders Like Equity
More than any other form of security, lenders are happy to accept capital. This is what makes a home equity loan, especially for bad credit borrowers, so affordable. The reason is simply the value of question security, which generally increases over time.
Due to the robust nature of equity in the home, the perceived risk involved is extremely low, and therefore they are generally willing to grant loan approval at low-interest rates. That is the main advantage of the loan to the borrowers, since it makes the payments even more affordable.
The advantage for lenders is that they know that a borrower is unwilling to allow his home to be lost on a home equity loan. And with the value of equity expanding every year, the chances of losing an additional source of financing to rescue a bad financial situation are slim.
How the loan works
The basic principle of getting a bad credit home equity loan is that the equity value pinned on a home can quickly turn into cash. This cash can be used to pay off other existing loans, eliminating debt and improving credit scores. As scores increase, the credit rating gradually improves moving the applicant towards the status of a good credit borrower.