Bad Credit Home Equity Line of Credit

If you have a below-average credit score and are having trouble being approved for a loan, mortgage, or credit card, you may want to consider a bad credit home equity line of credit, also commonly referred to as an HELOC. A home equity line of credit is basically a type of loan that allows you to borrow money against the equity in your property. Many lenders feel comfortable loaning money to subprime borrowers via a bad credit home equity line of credit because the majority of homeowners will be more reluctant and less likely to default on a loan that uses their property’s equity as collateral. However, while an HELOC may be a suitable option for some borrowers in times of need, it should be used as a last resort, as defaulting could result in the loss of all equity in your home, and many industry professionals attribute the recent subprime mortgage crisis to the abuse of home equity lines of credit.

How Does a Bad Credit Home Equity Line of Credit Work?
Unlike a conventional home equity loan, a bad credit home equity line of credit does not provide a lump sum equal to the home’s equity, but rather gives the borrower a set credit limit based on the terms and conditions set by the lender. This line of credit can be borrowed from throughout the “draw period” which usually lasts anywhere from 5-25 years. When the borrower makes repayments towards an HELOC they are actually repaying the amount borrowed in addition to the standard interest rate defined by the lender. Most home equity lines of credit have a minimum monthly repayment requirement, which is usually equal to the amount of interest accrued during that month. Once the draw period expires the remaining amount due must be repaid in the form of a balloon payment (a lump sum), however in some cases the lender will extend the duration of the loan and offer a revised amortization schedule to help the borrower avoid default.

What to Examine before Taking out a Bad Credit Home Equity Line of Credit
The first aspect of a bad credit home equity line of credit to consider is the interest rate, which can be either fixed (remaining the same throughout the duration of the loan) or adjustable (fluctuating depending on economic factors). While loans with fixed rates are certainly preferable, it may be more difficult to obtain approval for them, so the majority of home equity lines of credit carry an adjustable rate. Loans with fixed rates usually carry a higher APR (annual percentage rate), however they provide the convenience and stability of knowing exactly how much monthly repayments will be throughout the duration of the loan. If you are applying for a line of credit that carries an adjustable rate it is important to examine rate terms and conditions, particularly the periodic, which determines how much the interest rate is subject to fluctuate.

Comparing Lenders That Offer a Bad Credit Home Equity Line of Credit
When comparing lenders that offer HELOCs it is important to determine their trustworthiness, reputation, and their ability to provide useful advice in a friendly manner. Look for lenders that have professional and informative websites that allow you to apply for and learn about loans online. It is also important to check with the BBB (Better Business Bureau) ensure that there are not a significant number of complaints filed against the lender, as this may indicate that they are less reliable than their competition. Ultimately, the reputability of a lender will be defined by the terms and conditions offered on their financial products, so be sure to thoroughly examine every loan agreement before applying.