An equity loan means a mortgage placed on real estate in exchange for cash-money to the borrower. Let's take an example. If a person owns a home worth $100,000, but does not currently have a lien on it, this person may take an equity loan at 80% loan to value or $80,000 (in cash) in exchange for a line on title placed by the lender of the equity loan.
By many lending institutions, the borrower is only required to repay an interest component of the loan each month. This loan is calculated daily, and compounded to the loan once each month. At any time, the borrower can apply any surplus funds to the outstanding loan principal. This action then reduces the amount of interest calculated from that day onwards. Some products offered by the lending institutions also allow the possibility to redraw cash up to the original LTV. This potentially perpetuates the life of the loan beyond the original loan term.
Usually, the rate of interest applied to unsecured loans (such as credit card debt etc.) is much higher than that applied to equity loans.
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