Is an equity loan the right option for you?
If you are planning a home renovation project or require a huge amount of money urgently for an emergency, there is the option of an equity loan which you can apply for using your house or your car as collateral.
What is an equity loan?
The equity loan is the large lump sum amount that you can borrow based on the value of your asset- be it your house or an expensive car. Your current equity plays a very important role. The equity loan is also known as a secondary mortgage because it is offered on the basis of the value of your asset after the amount of a previous debt is deducted from it. It is as if you are taking a surplus loan on your existing credit against the equity amount of the same collateral which you had used for the first loan.
When should you go for an equity loan?
It is not always wise to add on to your debts by taking a second loan against the equity of single collateral. The danger of losing the asset due to non-payment becomes very high. An equity loan should be considered in case you have an emergency or you want to start a new business. However, there is a certain criteria which needs to be met for becoming eligible for an equity loan:
– Your credit score needs to be excellent
– Your total equity amount should exceed the equity amount on your collateral
– You need to have a steady source of income to pay off the debts
Disadvantages of equity loans
-If the value of your asset, especially if it is property, decreases over time, then the amount of loan which is due becomes greater and makes it difficult for you to pay off the loan faster.
-You can lose your asset and your credit score can take a nosedive if you are unable to make repayments on time.
-You need to pay extra interest on the surplus borrowed amount which can increase your debt burden.
Online equity loans
The conventional lending companies and banks can make it very difficult for you to get an equity loan because they have strict norms. However, you can go for online loans by finance companies who provide flexible and affordable equity loans which get sanctioned within twenty four hours. These companies do not put much emphasis on credit scores and help you to pay off old debts with the surplus amount.
Equity loans should be applied for only after careful consideration of the current financial situation and the ability to pay back the money on time.