For those with bad credit, home equity loans are still possible, but getting them is not as easy as it was even a few years ago. Home equity loans represent a great choice for those with poor credit scores to get money they need for a variety of reasons. Principle among them is paying off credit cards with high interest rates, settling medical bills, or affording home improvement projects. And in fact, home equity loans, since they are secured, are an excellent choice for anyone whose credit score is low.
What Is Bad Credit?
Many people know that they have "bad credit," but few truly understand what that means. The Fair Isaac Corp. developed an algorithm for calculating a person's creditworthiness. This equation takes many factors into consideration including total assets, credit history, past payments and late payments and the total debt you currently have. The number that is generated, known as a FICO score, can be anywhere from 300-800.
Bad credit is defined as a score lower than 600 (or 650 in some cases). Having bad credit means that you are less reliable as a borrower and therefore you will either receive few loan offers, high interest rates, or low principle borrowing amounts. Home equity loans may present a different option, however, due to their secured nature.
What Is a Secured Loan?
Since home equity loans are secured, bad credit presents less of a barrier than it would if you were looking for an unsecured personal loan. Secured loans simply mean that there is a safety net for lenders. When you borrow money using your home's equity or value, your home is essentially being used as collateral for the money that the lender gives you. Therefore, bad credit is not as much of an issue. If you fail to pay your loan, the lender can simply repossess your home.
Improving Your Loan Chances
Seeking a secured loan is the first step towards getting the money that you need, however there are additional changes that you can make to improve your creditworthiness before you talk to lenders. Bad credit is caused by many different factors, and some are simple to fix.
1) Late Payments - even if your credit history is full of late payments on bills, making sure that you get everything in on time for 6 months prior to applying for your home equity loan can help to show lenders you have reformed your bad habits.
2) Too Many Payments -One reason that many people seek home equity loans in the first place is to consolidate debt. Show the lender your payment plan and how your new loan will help get you back on track.
3) History of Bankruptcy - If you have a bankruptcy in your past, it is important to be willing to discuss it and show the lender how you have changed since that filing. Bring proof of timely payments on bills and consider getting letters of reference from employers and others who can vouch for your responsibility.
Finding the Right Loan
Despite bad credit, home equity loans are not as hard to find as you think. However, where you look for them will be a large determiner in what kind of deals you can get. Look to online lenders who specialize in bad credit lending. There are dozens of great lenders out there and the convenience of the internet will allow you to quickly and easily compare their rates and offers. Plus, they are used to working with people who have bad credit.
Home equity loans are a great option for homeowners in need of cash. Start your search today and follow this advice to get the money you need effectively.
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