How to Obtain an Equity Loan with Poor Credit? 6 Important Tips

An equity loan is a type of loan that is received against some asset with equity. In this type of loan, equity is offered as collateral to obtain the loan amount.

The asset or equity offered as collateral in this type of loan must have a fair market value above any pending loan payment or mortgage payments in the case of homes.

This security allows asset owners to obtain loans easily while allowing lenders to reduce the risks associated with loans.

The most well-known type of equity loan is the home equity loan. The home equity loan is obtained by offering a home with a fair value above any remaining mortgage payments.

Home equity loans are generally easier to obtain than other types of loans.

This is mainly due to the reduced risks for lenders due to the secured asset. In case of default on payments, lenders can easily recover the loan amount by auctioning the secured asset.

Secured Loans vs. Unsecured Loans

There are two main types of loans that are provided to different entities. Secured loans are the type of loans in which there is an underlying asset offered as collateral.

This type of loan is more secure for the institutions offering the loan as it allows them control over the asset in case payments are not made instead of the loan.

These loans also offer borrower benefits such as lower interest rates due to the secured asset. On the other hand, unsecured loans do not have an underlying asset provided as security.

These loans are harder to obtain as their requirements are stricter than secured loans. The risks associated with unsecured loans are generally higher for the provider institutions.

Lenders cannot recover the loan without legal action if borrowers fail to repay the loan. Since the risk associated with unsecured loans is higher, the interest rates on secured loans are also higher.

Credit Rating

Credit rating is the quantification of the creditworthiness of an entity. A borrower’s credit rating gives background information about how the borrower has dealt with previous debts.

Any entity can have a credit rating. For example, individuals, businesses, or even states can have credit ratings.

When requesting a loan, the institution assesses a borrower’s credit rating. Different lending institutions will have different credit rating requirements for borrowers.

In the case of equity finance, the borrowers’ credit rating is also assessed. However, the credit rating requirements for equity loans are lower due to the security provided.

This is because the security decreases the risk of the loan. Therefore, even borrowers with poor credit ratings can obtain equity loans easily.

While obtaining an equity loan may be easier for borrowers with poor credit ratings, their credit rating still dictates the loan’s interest rates and other terms.

For example, a borrower with a lower credit rating will have to pay higher interest rates than borrowers with higher credit ratings.

Tips to Obtain Equity Loan With Poor Credit

The credit rating determines whether or not the borrower will be granted the loan and the terms of the granted loan, such as interest rates.

Equity loans may be easier to obtain for borrowers with good credit ratings than for borrowers with poor credit ratings. Borrowers with poor credit ratings must follow a few tips to obtain an equity loan.

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1) Improve Credit Ratings

While borrowers with a poor credit rating may find it difficult to improve their credit rating quickly, the borrower’s credit rating is the decisive factor for the equity loan.

Even outside of obtaining an equity loan, improving credit ratings can benefit individuals. Borrowers can try to pay their debts on time to improve their credit scores.

If there are any inaccuracies in the borrower’s credit reports, they can dispute them to remove them—many reasons a borrower’s credit rating may be considered poor.

For example, if the borrower has accumulated a lot of debt from different sources, the borrower’s credit rating will be negatively affected.

Likewise, any late payments on bills or loans will also adversely affect the credit rating.

If borrowers have a poor credit rating, the best way to improve the credit rating is to compensate for past errors by properly taking care of current or future credit obligations.

2) Improve Debt To Income Ratio

The Debt To Income (DTI) ratio is the ratio of the total debt of an entity to its total income. Apart from considering improving credit ratings, borrowers can also focus on decreasing their Debt To Income ratio.

Lenders use a borrower’s debt-to-income ratio to determine how much debt the borrower has taken compared to their total income.

Lenders look for an ideal debt to the ratio of mid to low 40s. The debt-to-income ratio can also be improved, like the credit ratings for borrowers.

The debt-to-income ratio can be improved by decreasing the debts a borrower is obligated to pay or increasing their income.

The debt-to-income ratio can help compensate for a poor credit rating as it helps lenders determine whether the borrower can repay the loan or not.

3) Determine Loan To Value Ratio

The Loan To Value ratio is the ratio of a loan to the value of the asset that is being provided as collateral.

For equity loans, the value is taken as the amount of equity offered as security. For example, for a home equity loan, the loan-to-value ratio is the ratio of the loan to the equity in the home on which the loan is being taken, less any pending amounts payable on the home.

The loan-to-value ratio of a home is the loan ratio that the lenders will provide based on the home’s value.

Borrowers should determine the loan-to-value ratio requirement for the particular lender they want to obtain a loan.

Once this ratio is determined, borrowers can estimate how much they can expect to receive a loan. The lower the loan-to-value ratio of a loan, the more willing the lenders will provide the loan.

4) Adding a Co-Borrower to the Application

Another option that borrowers applying for equity loans have is to add a co-borrower to their application.

Co-borrower can be partners, family members, or friends. Usually, co-borrowers are individuals who are trusted by the main borrower and also trust the main borrower.

Co-borrowers should be individuals that have a better credit rating than the main borrower. This can significantly increase the chances of approval.

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Once a co-borrower is added to the application, the credit ratings of both borrowers are averaged out. The loan is approved if the average credit rating matches the lender’s requirements.

Co-signing a loan application may prove risky for co-borrowers as in case of failure of the main borrower to repay the loan, the co-borrower will be held liable.

5) Consider Other Lenders

As suggested above, different lenders have different requirements regarding credit ratings. If a borrower does not meet the credit rating requirement of a particular lender, they can look for other lenders.

While other lenders will also have some credit rating requirements and have different loan terms, a lender might approve a loan despite a poor credit rating.

Borrowers must, however, consider why the lenders are providing them with loans despite their poor credit rating.

The reason should be justifiable by an increased interest rate requirement. However, some lenders may have hidden charges or costs that may benefit the lender but adversely affect the borrower.

Therefore, borrowers should perform due diligence before choosing a lender.

6) Consider Other Options

Ultimately, if no other option works out for borrowers, they should start looking for alternatives to equity loans.

Borrowers can obtain other types of secured loans, such as cash refinancing, similar to a home equity loan, as it also requires the borrower’s home to be offered as collateral.

Borrowers can also look for unsecured loans such as personal loans or credit card loans. Borrowers with a poor credit rating can also avail themselves of subprime loans.

Subprime loans have a lower loan limit but significantly higher interest rates.

Subprime loans are targeted at borrowers with poor credit ratings. However, subprime loans should only be used as a last resort as they are typically highly disadvantageous for borrowers.

Banks That Offer Equity Loans with Poor Credit

If you’re looking for a bank that offers equity loans to people with poor credit, you may be out of luck.

Most banks require good to excellent credit to qualify for an equity loan, and if your credit is poor, you probably won’t be able to get approved.

However, a few banks specialize in giving loans to people with bad credit, so it’s worth checking them out.

You may be able to get an equity loan with poor credit if you meet the requirements of one of these banks.

National Bank of Commerce

Established in 1889, the National Bank of Commerce (NBC) provides exceptional financial services to clients worldwide.

From commercial banking to treasury management, NBC meets its customers’ diverse needs with tailored solutions and innovative products.

Its dedicated staff is committed to providing its customers with unparalleled service, removing barriers and fostering a streamlined banking experience.

NBC believes that empowered relationships lead to empowered prosperity, creating flexible and replicable approaches for large and small businesses.

Whether it’s helping an individual or a multi-national corporation reach their goals, the National Bank of Commerce is ready to go the extra mile.

Regions Bank

Regions Bank offers an Equity Loan for those with a poor credit score, providing a great option for financing.

This loan enables individuals to take advantage of their residential equity, allowing them to access the money they need without worrying about a low credit rating.

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The loan provides flexible repayment schedules and competitive rates, enabling customers to secure the funds quickly to achieve their financial goals.

With this solution, Regions Bank is committed to helping customers even when other financial institutions have turned them away due to poor credit.

SunTrust Bank

SunTrust Bank is offering equity loan with poor credit as a way to help motivate clients seeking assistance to start small businesses and accomplish individual goals.

Even individuals with deficient credit scores can benefit from this offer, putting them one step closer to achieving financial success.

Through this approach, we strive to maximize clientele opportunities while minimizing financial risk.

SunTrust Bank wants all its customers to have the chance to make their dreams come true without having to worry about present or past challenges blocking their path.

As such, our equity loan offer with poor credit is a great way for those in need of assistance to get back on their feet and maintain the road toward prosperity.

Fifth Third Bank

Fifth Third Bank is proud to offer our Equity Loan product to those who have poor credit scores. With this loan, you can use the equity you’ve built up in your home to access financing, regardless of your credit history.

You will receive a fixed rate and a lower monthly payment, allowing you to save money over time and build financial stability.

Plus, our commitment to helping customers with bad credit means that we have low fees, more flexibility on repayment terms, and quicker processing times than most other loans available for people with poor credit score.

Reach out today to learn more about this unique opportunity from Fifth Third Bank and take advantage of what the Equity Loan has to offer.

PNC Financial Services

PNC Financial Services offers a special equity loan to those with poor credit. Their terms are flexible, and the repayment plans are tailored to fit the individual’s budget.

This loan allows borrowers to use their existing home equity as collateral for a low-cost loan. PNC Financial Services can provide funds from $25,000 – $500,000 at a competitive fixed rate or variable rate, making it ideal for those seeking major financial assistance.

This loan could prevent extra seeking financing from other sources with higher fees and interest rates.

With the security of your home as collateral on this equity loan and customer service representatives ready to answer any questions about their products, PNC Financial Services presents an ideal option for those needing secure financing despite poor credit scores.

Conclusion

The equity loan is the type of loan where an asset with equity is offered as collateral to obtain the loan.

Since equity loans are less risky for the lender, they have a lower credit rating requirement for the borrower. However, borrowers with poor credit scores should follow some tips to increase their chances of qualifying for the loan.

These may include improving their credit score, improving their debt-to-income ratio, determining the loan-to-value ratio of the loan, adding a cosigner to the loan, considering other lenders, or considering other options altogether.