Sometimes referred to as a “home equity loan”, homeowner loans are a kind of secured loan. The value of your home is taken into account when a lender is deciding whether to approve your loan application.
This is called “collateral”. The lender will sell your collateral in order to settle the loan in the event that you are not able to make the repayments.
The lender will look at the value of your home, then they will look at how much of the mortgage you have paid off. The amount that you have already paid is called your “equity”. The size of the loan that you can take out is based on how much equity you have (how much of your mortgage you have paid off).
This allows you to take out a much larger loan and pay it off over a longer period. However, if you cannot make your loan repayments, the lender is able to repossess and sell your home.
What is a credit score?
A credit score is what unsecured loan providers use to gauge how likely it is that you will repay your loan. Your credit score is built up over years – getting better with each time you pay your bills on time and with every repayment of a debt that you make.
How do you get a bad credit score?
You can get a poor credit score by missing payments on any loans you have previously taken out, by defaulting on any debts that you have had in the past, and even by applying for too many short-term loans at one time.
What happens if you have a bad credit score?
People with bad credit scores will have fewer lenders who are willing to work with them. They will also receive a higher interest rate than people with a good credit score. This is because the loan provider can see that a person with a good credit score is more likely to make all of their repayments on time and in full.
This results in people with a bad credit score finding it harder to take out a loan with reasonable terms – which is often the best way to raise your credit score. However, if you take out a secured loan, then all of the protection that a loan provider would get from someone with a good credit score is made up for by using your home as collateral.
Why are homeowner loans good for people with low credit scores?
By law, the loan provider who assesses your homeowner loan application has to perform a credit check on you – there just isn’t as much emphasis on your credit score as there is with an unsecured loan.
There are three main benefits that people with poor credit scores have when they come to take out an unsecured loan, which is :
Low interest rates
Secured loans (such as a homeowner loan) often have lower interest rates than unsecured loans. This is because of the lender’s security that we mentioned before. For this reason, secured loans are easier to pay off, because you won’t need to pay as much in the long run in order to gain finance.
More lenders willing to work with you
Because lenders put less emphasis on credit score, you will find that more lenders will be willing to accept your application. The reason that this is a benefit is the more lenders who are willing to work with you, the more choice you get when it comes to the terms they are offering.
This means you will be able to find a loan that works for you – with a reasonable interest rate.
Pay back a loan over a longer period
Many secured loan providers will offer you the ability to pay back your loans over a longer period. This makes each of the repayments smaller, which can be much more manageable for many people. This way, you will only have to set a little bit of money aside each month in order to cover the costs of your repayment.
It is worth mentioning that the longer your repayment terms, the more you will end up paying. Regardless of the interest rate, the faster you can pay back the loan, the less you will have to pay in interest. It is a good idea to work out how much money you can spare a month so that you can find the balance between manageable repayment installments and be able to pay back the loan as soon as possible.
Are there any alternatives to homeowner loans?
Instead of having to risk losing your home, you should consider choosing an unsecured loan. Even if you cannot make the repayments, your home will not be sold.
There are two main types of unsecured loan, payday loans, and short-term loans.
Short-term loans are paid off every month and they typically have a repayment period up to 12 months. This allows you to choose an amount of time to repay your loan that you are comfortable with. These loans are better suited to one-off purchases that can be easily repaid over a few months.
Alternatively, you could choose a payday loan. These loans are normally for a smaller amount of money, and they are typically repaid on your next payday. This means that you don’t have to worry about making several repayments, and it is all done as soon as your next paycheque comes into your bank account.
There are many loan providers who are willing to offer short-term or payday loans to people with poor credit. They will be able to come up with a repayment plan that works for you. This will also help boost your credit score.
Get a loan with Loan Broker
If you’re looking for access to finance and you don’t have a good credit score, try LoanBroker. We are a loan broker, not a loan provider. This means that we will send your application to our network of lenders.
The process starts with you filling out our application form. This is where you tell us how much you would like to borrow, how long for, and how you intend to pay back the money. We will then run a credit check on you.
Post that, we will show your application to our panel of lenders. They will review your application and make you an offer. After this, we will display the best offers that are available.
For more information about how we can help you get the finance you need, click here.
