In the world of finance, “easy money” is a concept that’s met with a great deal of concern and skepticism. In fact, many financial gambles and gimmicks that promise fast, easy money turn out to be a long term expense. Do hard money loans fall into that category?
How does a hard money loan work in the first place?
A hard money loan refers to a way of borrowing money without using traditional banks or mortgage lenders. It’s an asset-based loan that borrowers secure by offering up the value of property as collateral to individuals and private lenders. Although hard money loans can be used for just about anything, they’re especially popular in real estate.
How does a hard money loan work when time is of the essence?
When a borrower needs funds quickly and cannot receive approval from traditional lenders, hard money loans from private money lenders may be the only available option. This is especially true for borrowers that have little or poor credit history and may not be ably to qualify for a traditional bank loan. Hard money loans are not to be confused with loans provided by loan sharks, who use extremely high interest rates, threats, and illegal lending practices to take advantage of desperate borrowers.
The application process for hard money loans tends to be a lot simpler and faster than traditional loans. Even if a borrower has good credit and a stellar repayment history, applying for a traditional loan can be a painfully slow process. And because hard money lenders are not so much concerned with the borrower’s credit history as they are the value of the investment, the application and approval process tends to be a lot faster.
How does a hard money loan work if the borrower can’t pay it back?
Although hard money repayment agreements tends to be more flexible than traditional loans, the consequences of nonpayment on a hard money loan are no less severe. Because hard money loans are secured with assets and not necessarily the borrower’s ability to repay, the borrower risks seizure of those assets if they’re unable to pay their loan.
The value of the collateral is what the lender is most concerned with, and they will not hesitate to seize and sell that collateral in the event the borrower can’t or won’t make payments on their loan. Typically speaking, hard money loans tend to have higher interest rates and shorter repayment terms that generally fall between one to five years.
How does a hard money loan work in the long run?
While most hard money loans are short term, they have long run benefits. Although their interest rates tend to be high, hard money loans are a great option because the application process is relatively fast, approval rates are high, and their repayment terms are flexible. But as with any financial decision, it’s always important to consider the long term consequences.
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