Loan Types With Bad Credit Vary, With Home or Personal as the Main Loan Choices


When financial misfortune makes its mark, the pressures of meeting day to day obligations and, at the same time, catching up on debts and loan repayments that have fallen behind, can be acute. More often that not, it takes its toll by affecting the credit score of the individual, making loans with bad credit the only real option when seeking funding.

Of course, poor credit does not rule a person out of getting a loan. Instead, it simply affects the terms of any agreement, with the interest rates usually higher, the sum borrowed more limited and the loan period being restricted.

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These are generally accepted as par for the course when applicants see loans approved despite bad credit. The real question is what sort of loan is applied for. There are two main options, with a personal loan with bad credit often the choice made, but there can also be advantages with applying for a home loan with poor credit.

There is a difference between the respective form of loans with poor credit, but to identify which is best for a particular applicant, there are some clear factors to consider.

Considering a Personal Loan

When it comes to getting loans approved despite bad credit, this is one of the most popular loan options. The obvious advantage is that there is no collateral needed, which means it is accessible to a wider number of people.

Collateral is always welcome as far as lenders are concerned, but as a personal loan with bad credit, the inability to produce an item to use as security is no big deal. What is of greater concern is that there is a way to make repayments, which ultimately means the applicant has a steady job.

Of course, this is necessary for home loans with poor credit too, but with no collateral, it is the only security that the lender can turn to. And, since there is a bigger risk, the terms are not always ideal. Generally, the interest rate is higher, and the sum available is lower, with perhaps as little as $5,000 available. This is the disadvantage of taking out such a loan with bad credit.

Considering a Home Loan

The great advantage in turning to the home as a way to raise needed funds, is that it is an ideal form of collateral. This basically means that getting loan approval despite bad credit is quite straight forward, though it does depend on the value of the loan applied for and the actual amount of collateral available.

The available collateral is decided based on the amount of home equity that the loan can be drawn against, which is why the loan is also referred to as a home equity loan. A home loan with poor credit can be issued against this equity, which means that the loan can be much higher than a personal loan with bad credit, for example.

The equity value occurs as an existing home loan, or mortgage, is being paid off and the debt falls against the value of the home. Meanwhile, time also tends to see property increase in value. The combination of these factors increases the amount of free equity attached to the home, against which the loan with bad credit is drawn.

There are condition, of course, with most lenders only considering home equity as collateral when a minimum of 25 percent of the original mortgage is repaid. This can mean loan approval, despite bad credit, can be secured against at least $50,000.

Unlike personal loans with bad credit, which provides no collateral to be seized in compensation, this option can leave the borrower homeless if repayments are missed. With this kind of disadvantage, the pressure to make repayments can be more acute on this type of loan with poor credit than any other.


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