Bad Credit Home Equity Loan Rate Fundamentals

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A bad credit home equity loan rate will be higher than the loan rates for a comparable home equity loan. Many lenders will not make loans to borrowers with bad credit due, in part, to the economic and financial situation of late 2008. The lending and banking crisis has not gone away and lenders are not willing to change lending practices to assist bad credit borrowers. A loan rate established by a lender is based on the risk of default. Default risk is the risk that the borrower will not pay back the loan as promised. This risk is greater with individuals who have poor, low or bad credit. Lenders, still feeling the effects of the subprime mortgage debacle and the resulting losses that caused several banks to fail and AIG to go into government receivership, are not jumping in line to accept borrowers who represent a risk of defaulting on their loans. There are few important things to keep in mind when you have bad credit.

Comparing Loan Rates

If a home equity loan for a borrower with good credit has a loan interest rate of six percent, a bad credit borrower should expect  to pay a rate of 11 to 13 percent. The points and costs are higher for bad credit and are established by the lender. The difference should be closely analyzed because the higher payments may be over your budget. Keep in mind that most home equity loans are adjustable rates. Adjustable rates can go up without any notice, so you must always be prepared for the higher payment.

A bad credit borrower should question any and every offer made by a lender that promises a low borrowing rate for them, regardless of credit. Since a borrower’s credit rating is one of the biggest influences on a loan and its interest rate, making a promise to extend a loan without corresponding proof of creditworthiness means that there may be information missing with regards to fees, charges penalties and the true cost of the loan.

Cosigners and Collateral

Some lenders may extend a home equity loan to a bad credit borrower who provides sufficient collateral, or a cosigner. These requirements are not easy to meet because asking a relative or friend to place their credit history on the line for you is very risky for them. Also, your home may not have the collateral required for the loan. The value of the home is established by local market conditions and there isn’t anything you can do to alter that. Collateral requirements tend to be higher for bad credit borrowers.

Addressing Bad Credit

Lowering interest rates for a borrower with bad credit requires the borrower to address their credit situation. This is the best way to improve your credit situation and put yourself in a better position with a lender in order to obtain loan approval for a home equity loan. Ordering credit reports and addressing the outstanding items reported will take some work but will help improve your situation long term. Work on improving your credit for one or two hours a month. Plan, budget and write letters to dispute erroneous information on your report.