Home Equity Loans for Bad Credit Can Have Low Interest Rates

It would be easy to assume that home equity loans for bad credit borrowers can only come at a high rate of interest. After all, bad credit suggests a high lending risk, and charging a higher rate is how lenders minimize their potential losses. Of course, rejecting a loan is arguably even better - which is what many lenders do.But the fact is that loans granted on the basis of home equity are different to personal loans, and especially the unsecured type. This is because the equity in the home is used as a type of security, so getting approval with low interest rates is possible regardless of the credit history that the applicant might have.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 deals, it is important to know the conditions that an agreement comes with.Why Lenders Like EquityMore than any other form of security, lenders are happy to accept equity. This is what makes a home equity loan, for bad credit borrowers especially, so accessible. The reason is simply the value of the security in questions, which generally increases over time.Because of the solid nature of equity in the home, the perceived risk involved is extremely low and so they are usually willing to grant loan approval with low interest rates. That is the chief advantage of the loan to borrowers, as it makes the repayments all the more affordable.The advantage for lenders is that they know a borrower is unwilling to allow their home to be lost to a home equity loan. And with the value of equity expanding every year, the chances of losing an extra funding source, to rescue a bad financial situation, is minute.How The Loan WorksThe basic principal of getting a home equity loan for bad credit is that the equity value tied up in a home can be turned into cash quickly. This cash can then be used to repay other existing loans, thus clearing debt and improving credit scores. As the scores increase, the credit rating improves gradually moving the applicant towards the status of good credit borrower.Equity refers to the value of a property that is not taken by the mortgage. For example, a home purchased with a mortgage of $200,000 a decade ago, will have seen the mortgage balance fall with payments each month. Perhaps $75,000 will have been repaid over 10 years, so the equity is worth $75,000.And when it comes to getting loans with this kind of security, approval with low interest rates is only to be expected. Of course, as the property market develops, the equity increases too, with a home worth $200,000 a decade ago perhaps worth $250,000 now. This means a maximum home equity loan of $125,000 is possible.The Role of Credit RatingsCredit ratings have an influence over loan applications, but not decisive one. When it comes to getting home equity loans for bad credit, they have practically no influence at all. This is down to two reasons: the purpose of the loan and the security provided.Since the purpose of the loan is to repay existing loans specifically to improve the credit rating, the influence of the poor rating is irrelevant. Normally, the rating helps to decide the interest to be charged, but with such a strong security, approval with low interest rates is likely.So, when to comes to home equity loans, the benefits involved in turning home into cash are hard to ignore.