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Pros and Cons of Hard Money Loans

Hard money is the borrowing of money without the use of traditional lenders. Hard money loans are good for cases where a loan is needed quickly or when traditional lenders wouldn’t approve the loan. Traditional lenders require proof that you can repay the loan. They also look at your credit score and your income to determine your ability to repay the loan. This is normally a slow, tedious process even when your income is good, and your credit score is impressive.

On the other hand, hard money lenders, lend based on the collateral you use to secure the loan. They care less about your ability to pay the loan. Shouldn’t you repay the loan, they recover their money by taking the collateral and selling it. Most hard money loans are between one and five years. Before you apply for this credit facility, it is important for you to weigh the pros and cons of taking hard money loans.

 

PROS

 

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Speed

Since the hard money lenders are more concerned about the collateral you offer than your financial situation, hard money loans close within a short time. This is because no time is spent reviewing your bank statements, verifying the source and level of your income, etc. It even gets faster once you establish a relationship with the lenders.

Flexibility

Hard money terms and conditions are more flexible than it is with traditional lenders. These lenders have no standard method of underwriting the loans. Each loan is evaluated separately and individually. Thus you can negotiate off the repayment plan, period and even interest.

 

Collateral

If you are taking a hard money loan to buy property, the property itself acts as collateral for this loan. In other cases, you can use personal assets to secure the loan. Most of these lenders use a low loan to value ratios. This helps the lenders recover their money quickly in case you default on the loan.

 

CONS

 

Cost

Although hard money loans are quite convenient, they are more expensive compared to traditional loans. Most of these loans have double-digit interest rates. The loan also includes other costs such as closing costs, originating fees, and loan servicing fees. These additional fees make the loan even more expensive.

 

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Short Repayment Period

Due to the nature of the loans, they tend to have a shorter repayment period compared to those from traditional lenders. Hard money loans typically have a tenor of between one and five years. As you choose the lender, ensure that you get the clear repayment plan and period. Due to the short-repayment period, this type of loans is mainly used ideal for a fix and flip investments. This is because the money collected from the loan is used to buy and renovate the investments. These investments are normally sold at a higher price than market value due to the renovations. As such the borrower makes money quick, repays the loan and remains with some profit. It is also used to buy and hold investments.

There are many hard money lenders to choose from. Take time and identify the one with the most favorable and negotiable terms for you.…