Beware the Fast Home Equity Loan

Fast home equity loan approval is one route to achieve immediate financing based on the value of your home. Since you are using the asset as collateral, the loan application process can be much more straightforward than other loan types. Just because the loan is straightforward and is processed quickly, though, does not mean it is the best option in your situation.

Risks of Fast Approval Loans

Any loan that promises a fast approval process presents unique risks. First, the loan application is not as detailed. The lender will simply extend a loan to value ratio based on the size of the asset you are placing down to secure the loan. A more detailed process would also consider items like your other debt payments, incomes and asset base in order to determine an appropriate limit. When only one factor is considered when determining a limit, you will be running the risk of taking a loan that is too large for you. Some borrowers think they know what they can afford and the limits they need. However, lenders perform their own financial analysis of your position to set limits based on understanding of the complicated credit markets, which are often more detailed than your own. Without a responsible lender performing this analysis, you may find yourself in too much debt.

Risks of Home Equity Loans

Not only are fast loans risky, but home equity loans add to the general risk factor associated with this loan option. Using your home equity as collateral removes the stability you have gained through paying down a portion of, or all of, your mortgage. Owning a home outright is the road to financial security in the future. Each time you take a home equity loan, you put yourself further away from the goal of total home ownership. Further, if you are still making mortgage payments, you will now owe two home payments each month. If you default on your home equity loan, the home equity lender can purchase your mortgage and force your home into foreclosure. Ultimately, you are truly placing your family's residence on the line anytime you fund a loan using the value of your home equity.

Alternative Financing Options

You have other options to consider before using a home equity loan. Of course, securing the loan with collateral will make the interest rates cheaper. However, you can secure a loan against an automobile for relatively low rates. The limits will also be lower. In the end, though, you are risking a much less expensive and valuable asset. It is possible to use stock certificates and savings accounts to increase loan limits. You may also consider a high risk or unsecured loan in order to cover an expense. If you have a high enough income and asset base, most lenders will extend you a loan without asking you for collateral. You will be risking little other than your credit score if you default on the loan. If you pay the loan off, your score will go up immensely, saving you money on future loans.