Usually we go to banks to seek mortgages or take loans. There are many financial institutions in the market can provide you loans as well.
Have you ever heard of the term, hard money loan?
A hard money loan is an asset-based loan financing that is secured by real property. A borrower can receive funds with his or her real property as a collateral. This kind of loans are often considered as short-term bridge loans, which has similar criteria for lending as well as costs to the borrowers.
Generally, private investors or companies, not banks, issue hard money loans. Interest rates are typically higher than normal loans because of the higher risks the lender will take and shorter duration of the loan.
When you ask for a hard money loan, most lenders will consider the value of commercial real estate rather than the credit risks of you to measure the risk of the loan. Most commercial loans will give borrowers a few years as long-term loans to make you repay on time, but hard money loan is a short-term loan type. Usually this type of loan has a term of 6 to 24 months.
One most obvious advantage of hard money loan is that you can raise money quickly. Usually you get money much quicker than applying for a mortgage through a bank. Private investors can make decisions faster because they often don’t make credit checks. If the borrower fails to repay, these investors may earn money through resell the property.
Also, borrowers can negotiate with lenders about when to pay, and how to pay for the loan.
However, there are disadvantages. Hard money loans have lower loan-to-value (LTV) ratios, which means the risks are bigger. For borrowers, the interest rate is much higher than commercial loans. As of 2019, hard money loan rates ranged from 7.5% to 15%, depending on the length of the loan.
Though hard money loan can give you advantages and help you get through hard times quickly, you should still think clear of the disadvantages and do a thorough assessment for yourself.