Hard Money Basics

What Is Hard Money?

Conventional bank loans require you to guarantee that you are worthy of repaying your loans. Banks verify your credit report and sometimes ask for collateral security as a proof/ guarantee. Lenders also decide the loan based on your creditworthiness and your income. However, if you have a good credit score and a satisfying credit history, then your loan application will get approved easily.

However, conventional loans take time to get sanctioned and sometimes you may also face rejection due to your credit ratings. Banks may also deny giving you loans if they believe you do not have enough income to accommodate a loan.

When you are in urgent need of money, you may not feel like availing conventional loans as they take time to process. In such scenarios, you may use hard money as an alternative source of credit. 

Hard money is a short-term loan that is generally offered by private lenders. A hard money lender extends credit to the borrower by taking collateral to secure the loan. Here the focus is not on your ability of repayment; rather it is on the value of your collateral. These are usually short term loan that can be repaid rather quickly.

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Why Use Hard Money?

Hard money loan is a good option for borrowers who are unable to obtain banks loans in certain circumstance and when they are in urgent need of cash. There are certain benefits of availing hard money loans:

Approval: The process of approval of hard money is very straightforward. You are approved a loan based on the collateral you have provided. The lender will evaluate the market value of the assets and will give you an amount that is pretty much the worth of the property. Hard money is mainly beneficial for borrowers who already have more than one bank loan or have a bad credit score.

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Quicker Loan Disbursal: Hard money loans are disabused quickly as opposed to traditional loans. Here the focus is mainly given to the collateral security rather than the financial position of the borrower. Therefore, the lender does not need much time as there is no loan approval or income verification process. If you are in good terms with a hard money lender or if you know him personally you will be able to access the money immediately without much hassle.

Flexibility: There is no standard underwriting process for hard money loans, unlike bank loans. So here the loan agreement is much more flexible and you will be able to negotiate on your loan terms and the repayment schedule.

When does Hard Money Make Sense?

Hard money loans can be good lending options in a variety of situations. They may differ from conventional loans but prove to be beneficial in some ways for certain needs or projects. As such hard money loans are more flexible and can be easily accessed than bank loans.

Here are some scenarios when hard money loans can prove to be very helpful:

• In situations when there is time constraint like medical emergencies or for urgent business requirements.
• A situation when short-term credit is required
• When a person has a poor credit history

Hard money loans are an alternative source of financing existing side by side to conventional loans. You can avail hard money loans in urgent situations when conventional loans are unattainable. These loans do not need credit history and need lesser time to be sanctioned, unlike conventional loans which require a better credit history and proper verification to be sanctioned.

See Also: Personal Loan in India

Hard Money Drawbacks:

Hard money loans are for short-term use only:

Hard money loans can be availed only for a short period (1 to 2 years). The longer the loan tenure then more risk the lender is taking as there is interest rate uncertainty. The lender has no idea where the interest rate will move by the end of the loan tenure. If interest rates drop, the borrower has the option of refinancing to the lower interest rates. If the interest rates increase, the borrower can keep their lower interest rate loan and the lender is forced to wait until the loan becomes due. This shows there is a risk thus forcing lenders to offer loans only for a short tenure.

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The interest rates on these loans are higher than conventional loans:

The interest rate on hard money loans is higher than bank loans. The higher interest rate is due to the risk factor and the convenience of immediate access to credit. The rate of interest on hard money loans ranges from 10% to 15% depending on the sum borrowed. The lenders may also charge an origination fee which ranges from 2% to 4% of the loan amount.

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