What Is a Bad Credit Home Equity Loan?

A bad credit home equity loan is designed to help those that have not had the best credit history tap into their home equity funds. Many people do not qualify for traditional home equity loans for one reason or another. Maybe they have been through a bankruptcy. They might have made consistently late payments for a long period of time. Regardless of the reason behind their low credit score, they are able to obtain the home equity loan that they need with bad credit lending programs. Here are a few things to consider about bad credit home equity loans and how they work. 

High Interest Rate

When you sign up for a bad credit home equity loan, you better be prepared to pay a higher-than-normal rate of interest. With bad credit, you will usually be a few points higher than your counterparts that have good credit. The reasoning behind this is the golden rule of investment. When you take on high risk investments, you do so in anticipation of a higher rate of return. With low risk, comes low return. When a bank is extending you a loan even though you have bad credit, they are taking a higher risk than they normally would. In order to offer the loan, they are going to require a higher interest rate. They know that there is a high rate of default with those who have bad credit. Therefore, they want to make as much money as possible off of you because of it. If they charge enough people that have bad credit a high enough interest rate, it will help cover the losses of those that default on their loans. 

Unfavorable Terms

Another thing that you can expect is less-than-favorable terms on the loan. When you have bad credit, you might not be eligible for the fixed rate loans that are so common for those with good credit. You might be forced to go with a variable rate home equity loan so that you can lower your initial monthly payment. Otherwise, you might not be able to afford the monthly payment because of your high interest rate. 

You might also be offered an interest-only home equity loan. This results in you paying only the interest on your monthly payment each month. This has no effect on the overall balance of the loan. At the end of the loan, you will be expected to make a balloon payment to eliminate the balance on the loan. This is a very dangerous type of loan that can leave you in default if you are not careful.

Obtain Funds

Although you are subjected to less favorable terms and interest rates as a result of your bad credit, the ultimate goal is still achieved. You wanted to get your hands on your home equity and this lets you do just that. You are now free to use the money on anything that you want. You can consolidate debt, upgrade your house, or invest the money. A bad credit home equity loan might not be ideal, but it does help you accomplish what you need to do. 

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