If you are looking for a loan, then you may want to consider a second mortgage. Also known as home equity loans, these allow you to access a lump sum of money that you can spend in any way you see fit. To be eligible, you need to be a homeowner with a substantial amount of equity in your property. You will then have to decide whether you want to take out a fixed or adjustable rate loan as well. One of the key advantages of this type of loan is that it generally has a much lower interest rate than a bank loan or credit card. Furthermore, up to a limit, the interest rate is tax deductible. But what is the impact of having bad credit on your eligibility of applying for a home equity loan?

Home Equity Loans and Bad Credit

All you need in order to be eligible for this type of loan is to own a property, as it acts as collateral. This means that you can apply even if you have bad credit. In fact, there are numerous agencies that focus specifically on people in that situation. Usually, you will have to make a couple of compromises, however. This includes higher interest rates, longer loan terms, extra fees, and/or extra charges. Furthermore, the lender may only borrow you a lower percentage of the available equity. However, you can still get an excellent deal regardless.

Before a lender will offer you a loan, they will check your credit rating with the major agencies, being TransUnion, Experian, and Equifax. These will then calculate what your credit rating is, evaluating how much debt you already have, how often you have applied for credit, and what your payment history is. You will be given a score ranging from 300 to 900. If your rating is below 600, you are classed as having bad credit. However, the closer to the 600 you get, the less risky you appear to lenders and the better the deals that will be offered to you.

You do, however, have to understand that having bad credit will mean that you pay more on your home equity loan than someone with good credit. Usually, this is due to higher interest rates. Unfortunately, because second mortgages generally in quite high amounts, paying more interest can equate to thousands of dollars. That said, as your score improves over time, you can decide to move your existing loan over to a different lender, significantly reducing your overall interest rate.

Make sure, before you apply for a loan, that you have a full understanding of your personal situation. Do also take the time to understand the terms and conditions offered by the lender, so that you don’t end up in trouble at a later date. For instance, you need to find out whether there will be an early repayment penalty if you do plan to move your loan over to a different lender.