Everyone has seen those ads promising a home equity loan with poor credit, and when you want to own your own home it’s very tempting to apply for poor credit home equity loans. A home equity loan is supposed to be low interest. They say it can help you redecorate your house, consolidate your bills or any number of credit emergencies. But what aren’t they telling you?

Having poor credit can make you feel embarrassed. Often borrowers are taken advantage of because of they often feel there aren’t any other choices. Many loan brokers are the only firms/people that finance any loan, including a poor credit home equity loan. They offer interest rates at the same rates as credit cards, and borrowers aren’t aware that they a) can qualify for lower interest rates than they are offered and b) can sometimes repair their credit in just a year saving them hundreds of thousands of dollars.

A typical home equity loan is anywhere from $30,000-$50,000. While the interest rate is lower than an unsecured loan, for bad credit borrowers the interest rate is still insanely high. Generally, with poor credit, a borrower can count on at least a 12% interest rate. At a ten year amortization the monthly payments would be around $450 and total nearly $22,000. Split that interest rate in half, for a good credit loan, and the payments amount to about $330 and around $10,000 in interest. In a ten year period, the borrower saves nearly $12,000, a hefty sum.

So how does anyone with poor credit get a home equity loan at low interest? The answer is to repair any bad credit history. This is easier said than done for anyone with unpaid bills. But if you’re able to pay off the bills and reduce your debt to income ratio, you can easily raise your credit score in a year or two.

The best way to start raising your credit score is to reduce your debt to income ratio. Since this is difficult for many people to do alone, visiting a credit counselor will help. A credit counselor can consolidate all your bills into one payment. They also arrange better terms of payback with your creditors.

Another way to increase your credit score, if you’re DTI isn’t a problem, is to get a secured credit card. Following the payment terms for 12 months can raise the FICO score on your credit report. A secured card is a credit card with a limit based upon a deposit made to the lender.

The bottom line is getting a home equity loan with bad credit is a terrible idea. Instead, spend a little extra time to increase your credit score and then apply for the loan as needed. Keep in mind that a home equity loan will have lower interest than a home equity line of credit, although both can be used for the same purposes.

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