Beware 'Bad Credit OK!' scam Home Equity Loan

So you're considering taking out a Home Equity Loan but you have a problem with your credit. Normally, a bad credit score inhibits the availability of credit. The thought is quite simply that if you have bad credit, you're unlikely to be able to pay back the loan. So, lenders won't touch you with a proverbial barge pole (let a lone a real barge pole).

And, to be fair, if you had a friend who you know had no income and a history of never paying anyone back who lent him money, you'd be wary of lending him money as well. Sure, if it was a life or death situation, you'd probably not think about it, but if it was because he wanted a new motorcycle I'm sure you'd think twice before parting with your own green.

Now, what if this imaginary friend of yours said to you "I know I'm a lousy risk for a loan but I'll sign my house over to you, so that if I don't pay back this loan within a couple of years you can sell my house and keep whatever you make from it"?

I'm sure you'd start listening a bit more intently. And you'd be doing a bit of math in your head. A motorcycle is worth what? $10,000? A house is worth $100,000? Mmmmm.

But that's not the kicker. If we were going to be unscrupulous to our imaginary friend then we'd offer him the $10,000 right then and there. Why did I say this was unscrupulous? Because we know that he's got a track record of not paying debt back. We also know he's not making a lot of money and he's going to find it difficult to repay us. In otherwords, the likelihood of him defaulting on this loan is quite high.

And if he defaults, that means our $10,000 loan has just turned into a $100,000 home.

Not bad for a few minutes thinking.

That's the kicker, right there. The "Bad Credit OK" label might seem like an altruistic sign from above, but it's not. It's quite the opposite. These guys aren't looking at helping anyone out, they're looking at finding people who are incapable of repaying a loan (which is already being paid back at high interest rates) so they can acquire the much more valuable collateral (the house).

It's a no-brainer for the lender. They either get the interest on the home equity loan or they get the home itself. And by preying on those with bad credit they can make even more from charging higher interest rates and significantly increase the chances of getting the proffits from selling the home itself.

So buyer (or borrower) beware. If my imaginary friend wanted to borrow money, I might lend it to him but I'd know I'd likely not get it back. I certainly wouldn't want him to do something as silly as sign his house over to me. That'd just be wrong, wouldn't it?