The Lender's Rationale for No Equity Home Loans

Lenders take high risks with no equity home loans. In this type of personal loan, your home is used as collateral even though you do not own enough of the home to justify the loan amount. This is basically a good faith offer from the lender.

High-Risk Loans

High-risk loans do not use sufficient collateral and may be offered to individuals with less than perfect credit. On the surface, a no equity home loan is a high-risk loan. However, it does not come with the very high interest rates and unfavorable terms of most loans. Instead, the interest rate may be only moderately higher than a home's mortgage.

Lender's Rationale

The reason lenders are willing to offer these loans is that homeowners are easier to collect from than non-homeowners. Once the lender has a lien on your home, even if you do not own the home, the lender has you on the hook for the total loan sum. It is not common for a homeowner simply to disappear and leave the lender without any opportunity to collect, which can happen with other high-risk loans. Ultimately, the lender is not actually taking a huge risk because the lender has a good chance of recovering the funds from you.