There are many ways to borrow money that each have their own pros and cons. The majority of loans require some sort of evidence that you have the capacity to pay back the initial investment. Traditional lenders operate by this system, and the process of obtaining a loan from a traditional lender can be tedious and time-consuming. Further traditional lenders tend to make safer loans and are looking for a specific clientele with a good credit score, an income, and a history of borrowing and paying off cash. If you don’t fall into those categories or need your loan swiftly, there is one path around traditional money lenders called hard money loans.
Unlike traditional lenders, hard money lenders lend you the money based on collateral securing the loan, meaning they have less worry about your history of repayment. If you cannot pay off your loan for whatever reason, the lender sells the collateral and thus makes back their initial investment. The loan itself tends to be short-term, ranging from 1-5 years. For your investor, the value of the collateral takes priority over your fiscal standing. The risk is that using hard money can be a dicier and more expensive proposition than using a traditional loan like a mortgage.
Hard money has a few significant advantages even given its potential downside. First and foremost, a hard money agreement happens fast. While lenders would rather not deal with the hassle of appropriating your property, it also allows them to make a quick assessment of whether you can pay back your loan. While a traditional lender might ordinarily have to parse through your finances carefully to ascertain whether you have the stability to pay off your debt, a hard money lender can assess your ability immediately off of the property you put forth as collateral. Speed of access can be immensely important if you need to free up some finances for a hot market or if you need to close a deal quickly.
Hard money agreements also provide a degree of flexibility that traditional loans do not. Traditional loaning has an underwriting process that does not exist in hard money lending. Each hard money deal is assessed on its merit, meaning the process is not standardized or fixed. The individual assessment leaves some wiggle room for negotiating around the repayment schedule, especially because hard money lenders can be individuals. Traditional lenders, however, tend to be corporations with stringent lending guidelines. The downside to this is that your lender might not value your property at the same level you do.
Hard money borrowing is not a magic bullet nor a loophole to beat the system. It’s just another means of securing a loan that is quick and streamlined. However, hard money loans often have interest rates of higher than 10%APR, meaning it’s really meant to be utilized as a short-term loan. Consider using a hard money loan for an investment like fixing up a house for a resell.