Homeowners with a house worth more than the amount owing on the mortgage can use this equity to consolidate credit card balances, vehicle loans, student loans, or other debts. Borrowers with less than ideal credit are not attractive candidates for unsecured bank or private loans. However, lenders are more flexible with applicants willing to use their home as collateral.
Two Types of Home Equity Products: Low Interest Secured Loans and Secured Lines of Credit
A home equity loan (HEL) is a fixed term product. The borrower receives a one-time loan from the lender, with a repayment schedule and a fixed interest rate.
A home equity line of credit (HELOC) is a revolving credit account, allowing the borrower to use the cash as needed. The repayment amount depends on the interest rate, which is usually slightly higher than that of the HEL, and the amount owing at the time.
How a Low Interest Secured Loan Can Help Reduce Debt
Low rate home equity products generally offer more attractive interest rates than credit cards or vehicle loans. The borrower can use the HEL or HELOC to pay off multiple creditors, leaving them with one monthly payment at a lower rate.
Applicants must read and understand the terms of the home equity loan or line of credit to ensure the interest rate is fixed, and not an introductory or discount rate. Secured loan or line of credit interest rates may also increase if the borrower misses or is late with a payment.
How to Manage Debt With a Low Rate Home Equity Product
Avoid borrowing more than the home is worth; some lenders actually approve loans or lines of credit that exceed the home’s market value, resulting in negative equity for the homeowner.
Debt consolidation companies can assist homeowners with debt management and reduction tools, including credit counseling services and professional advice. Best Debt Consolidation Services points to the top three debt consolidation companies, based on longstanding Better Business Bureau participation and user reviews.
Prepare for a Low Interest Secured Loan Application
Before applying for any type of loan or credit product, order a free 3-in-1 credit report and correct any reporting errors. Research the local housing market for a ballpark estimate of the current value of the home. Lenders are likely to have the property appraised; however, an appraisal far below (or above) the estimated market value could be a sign to try a new lender.
Create a shortlist of several lenders, based on company reputation, the types of products offered, and the advice of an independent credit counselor, when possible. Compare interest rates, but also the terms and conditions of each offer.
Low interest secured loans are a viable option for borrowers with immediate cash needs, home equity, and a plan to reduce debt to avoid the necessity for another home equity loan in the future.