Bad Credit Home Equity Loans

Written by Beth Hrusch
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Bad credit can haunt those who find themselves in need of cash. Financially, it can be devastating, as a bad credit score can mean the difference between a good quality of life and a poor one. Of course, people with bad credit have the same financial needs as everyone else, and therefore also have the need for good options when they need to borrow money for major purchases such as a car, home or business.

Bad Credit and Equity Loans

So, what can a person do when he or she needs a large sum of money but lacks a good credit history? If you own a home, a lender will look at the value of the home, most likely by having a bank appraiser go to the home and determine its value. Home ownership is a distinct advantage when applying for a loan, and it also gives the borrower the option of taking out a home equity loan. Even with bad credit, if you own a home it can be used as collateral against a loan.

A home equity loan is a simple and easy way to draw on the value of your home to get the money you need. In a high-risk lending situation, the lender will take all the factors into consideration when determining how much money should be lent at what interest rate. A percentage of the value of the home, as well as the borrower's actual credit score are two such factors. In the end, the amount authorized will reflect the bank's confidence that it can get the money back, either over time or in a foreclosure situation.

For the borrower, a home equity loan works like any loan. A monthly payment reduces the interest and principal over the term of the loan. However, in this case a lien is put on the home, giving the lending institution an interest in the home should it be sold. Thus, taking out a home equity loan also obligates the borrower to a second mortgage that must be paid when due or in the event that the home is sold.

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