Wednesday, July 11, 2012

Home Equity Loans With Bad Credit: Is A Line Of Credit Better?

When a loan applicant has a very poor credit history, getting approval can be difficult. This is especially true when approaching traditional lenders, who are known to avoid the risk involved in lending to such applicants. The good news is that getting home equity loans with bad credit does not have similar problems.

The key reason for the difference is that equity is a highly valued form of security, so securing loan approval on a loan that is provided on the back of property equity is not seen as a great risk. Equity, after all, never depreciates and the applicant must be a property owner to have it.

What this means is that a home equity loan is more readily approved than many others, but that is not to say that it is guaranteed to be approved. There are factors that should be considered in advance, one of which is whether a loan or a line of credit is the best option for the applicant.

Choose a Loan

There are two ways in which to use equity in your home to secure much-needed funds, and they are either a straightforward loan or a line of credit. Both have their advantages and disadvantages, but when seeking home equity loans with bad credit it is also important to consider the overall costs of the transaction.

The loan is the simplest option, but it is worth pointing out that the interest paid is applicable to the total amount borrowed. What this means is that by securing loan approval for ,000, the interest to be paid every month, for the full loan term, is for the full ,000.

What this means is that home equity loan approval is made a little more difficult as the application is measured against the ability of the borrower to pay the full amount over the full term. And, as a higher sum over a longer period, that can mean greater difficulty.

Choosing a Line of Credit

There are clear advantages to getting approval on a home equity loan with bad credit, but the interest rates will be higher when the applicant has a low credit score. But, a line of credit gives the borrower a greater amount of control over the interest issue.

This is because the borrower can spend as they need or as they see fit, and the interest is charged only on the money spent. When securing loan approval, interest is charged on the full ,000, but in this case, it is only charged on ,000 in the first month, if that is all the borrower has spent. The ,000 in the second etc.

The result is that the borrower can keep the interest payments in check for as long as possible, perhaps taking 4 or 5 months to spent the full ,000. It is, therefore, a more cost-effective option than a regular home equity loan.

Other Advantages to Consider

There are other advantages to both funding options. For example, applying for a home equity loan with bad credit promises a greater degree of flexibility with regards the repayment schedule. Lenders are more open to facilitating borrowers offering a share of property as collateral, and so it can be easier to. Also, because the repayments are structured, they are easily budgeted for.

However, while securing loan approval brings those advantages, a line of credit is also tax deductible, helping to lower the overall cost even further. Having said that, because the repayment sum is dependent on the amount of money spent, it is very difficult to budget for.

Basically, a home equity loan is simple to follow, but a line of credit can become quite complicated as the sum spent increases.

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