Taking out loans isn’t uncommon in the world. Even if you have money available, you may want a loan to avoid draining your bank account and pay what you owe over time. Reports show that 51.3% of Americans have taken on some sort of loan in their lifetimes.
However, getting a traditional loan isn’t always in the cards. In cases like this, hard money loans are a great option.
Do you want to learn more about hard money lending and determine if it’s right for you? Read the guide below to learn the answers to your questions.
What Is Hard Money Lending?
Hard money lending is an alternative financing option that allows you to borrow money from lenders that aren’t traditional banks. These loans are generally for purposes outside of what regular people use loans for. You’ll see many people borrow for commercial purposes.
Where this happens the most is real estate and business loans. This is great for short-term cash because hard lender money doesn’t usually have the same qualifications as regular loans. This means you can get money for purposes a typical lender would normally deny and get the money faster.
Most hard money loans are also secured loans. You’ll need to attach the loan to the property or something else with value. If you’re buying a property, the loan becomes attached to the property you buy.
Benefits of Hard Money Lending
Now that you know what a hard money loan is, the question is, are they worth getting? Read below to learn the pros of hard money lending.
Speed
The speed at that you get accepted for a loan is one of the most significant benefits of hard money loans. There may be situations when speed is of the essence, and you can’t afford to wait for acceptance from a traditional loan. If you wait too long, you may lose access to whatever deal you have.
Hard money loans are much faster to get accepted. This means you can pivot your decision-making quickly when getting these loans. This is great for people like property developers who need quick cash for a home purchase or business owners who need to take advantage of business opportunities quickly.
Flexibility
Flexibility is another significant benefit of hard money loans. With traditional lenders, you have a lot of restrictions that go along with a loan. You won’t be able to pivot your direction and use the money for something else.
The same isn’t true with private lenders. You don’t have restrictive covenants that you would normally get with banks. This means you’re flexible with what you do with the cash, and in many cases, use it as you please.
You just need to explain your vision to your lenders to ensure they know that you’ll be able to pay what you owe.
Easier Underwriting Process
You have to jump through a lot of hoops with traditional loans. Banks check your credit score, borrowing history, debt-to-income ratio, and countless other factors. This leads to a lot of back and forth that may not result in a loan.
Hard money lenders make things easier because they base their decisions on assets. As long as you have collateral for your line, you can expect to be accepted by a hard money lender. This is possible because your lender can seize your property if you fail to pay what you owe.
Cons of Hard Money Lending
Of course, there aren’t only benefits to hard money loans. Here are a few cons you’ll see when getting this type of loan.
Cost
Although getting a hard money loan and having more flexible terms is easier, that doesn’t come for free. Being looser with the terms means lenders are taking more risk. As a result, you have to pay for your money.
Expect higher interest rates when getting a hard money loan. This is a big problem if you need a longer amount of time to pay what you owe. However, if your loan is cash flow related and you expect to be able to pay your loan off in full sooner, the interest won’t be as big of a problem for you.
Shorter Terms
Although you may be able to get some long payment terms when you get this type of loan, that won’t usually be the case. Lenders in this space don’t want to risk longer repayment schedules. They want to get a return on their money as quickly as possible.
This means you won’t be able to get the same term length with hard money loans. Unlike traditional loans, where you have years to pay everything off, you’ll often find terms from hard money lenders that require you to pay off your loan within a year. This may be a dealbreaker if you don’t expect a quick return on your money.
Large Down Payment
A sizable down payment is another problem with hard money loans. Unlike traditional mortgages and loans with banks, there isn’t as much protection for the lender. This means they want a larger guarantee on your part.
As a result, you’ll often need a larger down payment for these loans. If you don’t have much money in the bank, it can disqualify you from these loans.
Apply for Hard Money Lending Carefully
Deciding to apply for hard lender money isn’t an easy decision. Although this is a great way to get quick cash, it also comes with a few strings that may not make it worth the risk in your situation.
Make sure you understand the pros and cons of hard money lending to understand the risks associated with the process. Once you do, you can determine if it’s worth getting the money you need this way.
Are you interested in reading more financial advice to help set yourself up for future success? Check out more financial posts on the blog to learn what options you have.
