Last Updated on May 12, 2022
Whether traditional lenders have turned you down or you’re simply considering financing options for an upcoming business venture, you’ve likely come across the term “hard money loan.” What is a hard loan, though, and is it right for you?
What Is a Hard Money Loan?
A hard money loan is a type of loan that is backed by physical assets. In other words, the one taking out the loan will secure it with real estate, precious metals or some physical object or objects that have value. That’s why it’s called a hard loan — there is a tangible asset that the lender can take if the borrower doesn’t pay back the loan.
What Is a Hard Money Lender? Who Offers Them?
Hard money lenders are private companies and individuals who make money by offering hard loans to business owners and other borrowers who can’t take out traditional loans. Banks and other regular lenders don’t typically provide hard loans.
That’s because hard loans typically carry a higher level of risk. If someone has to resort to securing their loan with physical assets, they probably have a bad credit score and don’t qualify for a traditional loan. That also means they are less likely to pay back the loan. Even though the loan is secured, the overall risk to the lender is higher.
What Is the Difference Between a Hard Money Loan and a Traditional Bank Loan?
The main difference between a hard money loan and a traditional bank loan is that a hard money loan is secured, while a standard loan is not. In addition, there are a few other significant differences to keep in mind:
- Banks require a good credit score before they can offer a loan; hard money lenders may or may not do a credit check.
- People who need quick financing prefer hard money loans; bank loans and mortgages can take longer to arrange.
- Hard money lenders limit the loan amount to the value of the assets used to secure the loan, while banks use other factors to approve loan limits.
- Banks will usually offer lower interest rates than hard money lenders.
How Do They Work? What Is the Process?
The process of signing up for a hard money loan is simple. The lender may want to check your credit score first, but having a good score is usually not as critical as it is for a bank loan. That’s because collateral secures the loan. Furthermore, hard money loans are targeted at people with bad credit or who otherwise can’t qualify for a regular loan.
The lender will, however, verify that you own assets to secure the loan and use as collateral. That will be the main factor they use to approve or deny the loan.
Since the process is straightforward, you can usually qualify for a hard money loan and get your cash within a few days. Before you get the loan, you’ll need to sign a contract and agree to the terms of the loan. You may also need to pay a down payment.
What Are They Used For?
People use hard loans for several purposes. Some real estate investors utilize them when they need quick cash to buy a sought-after property. A house flipper might take out a hard money loan to purchase a home, planning to pay off the loan once they have sold the house.
Small business owners also take out hard loans. Whether you need quick cash to stay afloat during a tough time or you want some money to expand your building or offer new services before your competitors do, a hard loan is an option worth considering.
Advantages and Disadvantages of Hard Money Loans
Before taking out a hard money loan, it’s critical to understand the advantages and disadvantages and decide whether it’s the best course of action for you.
Advantages of Hard Money Loans
The main advantage of hard money loans is that most people can qualify for them, even if banks and other lenders turned them down due to poor financial history. Whether your business is new or you have a bad credit score, a hard money loan might be one of the few decent options available to you.
Hard money lenders also can approve you for financing within a few days. As long as you have the collateral, that’s all most of them care about. You won’t have to go through the various processes involved in taking out a regular loan.
Disadvantages of Hard Money Loans
On the other hand, there are several cons to taking out such a loan. The first is that interest rates tend to be higher than with traditional loans. You should consider that fact and set aside enough money to cover the loan before taking it.
You may not be able to take out a loan for the full value of your assets. Some lenders may only approve you for 50-70% of the collateral’s worth, which can further restrict how much cash you can get your hands on.
Finally, hard money lenders may offer short-term limits, requiring you to pay back the loan in full within as little as six months.
What Should You Look Out for When Dealing With a Hard Money Lender?
There are a few vital things to look for in a hard money lender. The first is honesty and transparency. Good reviews or referrals can also ensure you aren’t dealing with a shady lender. Hard money lenders don’t have to comply with the same regulations as regular banks.
You’ll also want to look for a lender who offers low-interest rates and flexible payment options.
What Is the Bottom Line for Businesses Considering a Hard Money Loan?
The bottom line is simple: If you’ve been struggling to get approval for traditional loans, a hard money loan can be a great way to get cash quickly. At the same time, it’ll likely come with high interest rates, so search around for one with rates that you can afford.