Home Equity Loans for Bad Credit Borrowers: One Option to Consider

The challenge of getting loans can be significant when having no positive credit history to boast about. But while traditional lenders often prefer to turn down such applicants, the good news is that there are better lending options available. Even for those still repaying mortgages, getting home equity loans with bad credit is not impossible.The fact is that lenders want to continue to lend, regardless of the state of the economy. This makes sense since it is only through loans that they can make their profits. So, securing loan approval is not something to be scoffed at because of poor credit histories. While approval is never guaranteed, the possibilities are there.This is where a home equity loan can come in so useful, with the value of property repaid from the mortgage available as collateral. But even in applying for this kind of financing, there are two options to consider: a flat loan sum and a line of credit.Loans vs Line of CreditThe simple concept behind granting approval to applicants seeking home equity loans with bad credit is that those who have suffered financial bad luck in the recent past want to get back on track. In fact, lenders understand that low credit ratings do not translate to unreliable borrowers.Securing loan approval is arguably the straightforward option. It usually means placing a percentage of the available home equity up as security in return for a cash sum. For example, a home now worth $250,000, was originally purchased with a mortgage of $225,000 only 5 years ago. In that time, perhaps $50,000 of the mortgage principal has been repaid. So, a maximum of $75,00 in equity can be borrowed.Where a home equity line of credit differs from a home equity loan is that the total cash sum is not simply handed over. Instead, the funds are drawn by the borrower when necessary.Advantages of a Line of CreditWhen someone applies for a home equity loan with bad credit, the understanding is that interest rates with be fairly high on the total amount of money borrowed. Low credit scores tend to result in higher rates, so in agreeing a loan of say $50,000, the interest will be charged on the sum of $50,000. But it is not the same for lines of credit.To be given a line of credit basically means securing loan approval on a limited sum of money from the lender - in this case, a maximum of $50,000. However, what the actual amount borrowed becomes is down to the borrower. For example, in making home improvements they may find a way to make greater savings than expected.With a line of credit, the borrower only withdraws funds as they need it, so if the home improvement work is completed for a cost of $45,000, interest is only charged on that amount, So, the cost of the loan is less than a regular home equity loan would be.Other AdvantagesBut that is only one of the advantages of this kind of funding option. Applying for home equity loans with bad credit can result in much greater benefits. For a start, a line of credit is tax deductible which places it above a similar financing structure - credit cards.Also, repayment options tend to be more flexible than with straightforward loans, since securing loan approval does not mean a set amount with set interest costs from the off, as would be the case with a simple home equity loan.Instead, the cost of the loan is gradually built up, so with some careful management and budgeting, it is possible to draw credit slowly keeping repayments low over the lifetime for the loan deal.