Though you may think that “it is only cheating when you get caught”, the risk implied in breaking the rules imposed by the home improvement loan contract should dissuade borrowers from changing the purpose the money originally had. The purpose of the money lent is a loan condition and misleading the lender by providing false documentation could be considered to be fraud.

The Purpose Condition

You may wonder why does the lender care for what you do with the money as long as you repay it. Truth is that this kind of secured loan has low interest rates for two reasons: For starters, the repayment is guaranteed with the collateral and so there is little risk for the lender. But also, since these loans are usually equity loans and there is another lender with more rights over the property (mortgage lender), the fact that the money will be used to make home improvements and thus increase the property’s value also determines the better loan conditions that these loans feature.

If the money isn’t used to make home improvements, then, the lender looses an otherwise boost on the value of the property guaranteeing the loan which in turn increases the risk of the financial transaction. This risk increase would have determined a higher interest rate if the lender had known that the money would be used for other purposes.

As you can see, misleading the lender disrupts the loan’s original terms and could be considered to be fraud. Given that there are equity loans you can request with no particular purpose condition attached to them, it makes no sense to risk penalty fees or legal problems for a slightly lower interest rate.

Penalty Fees

Even if the lender chooses not to pursue legal actions, there are penalty clauses within the home improvement loan contract that punish this behavior with an increase on the interest rate you pay or with certain fees that will turn the loan considerably more onerous and risk your ability to repay the loan.

This can eventually lead you to defaulting on the loan and triggering the lender’s ability to use the legal action of repossession. Again, it makes no sense to loose your property for just a small difference in the interest rate. The money you might save does not compensate for the risks you would be taking.