Pros and Cons When Borrowing Hard Money: What You Need to Know
When you're in the market for a loan, you might have heard the term “Hard Money.” Hard money loans are a particular type of loan backed by assets rather than credit.
Hard money loans can be beneficial in several situations, but it's essential to understand the pros and cons before borrowing. This analysis will discuss the advantages and disadvantages of borrowing hard money, helping you make a well-informed decision about whether this type of loan is right for you.
What's the definition of “Hard Money Loan” in general terms?
In general terms, a hard money loan is a type of asset-based loan financing in which a borrower receives funds backed by real estate. These loans are usually issued at much higher interest rates than traditional loans and for much shorter terms, making them a high-risk but potentially lucrative investment.
The History Behind Hard Money
The term “Hard Money” historically referred to the physical properties of money, which, unlike paper currency, is made of hard materials like gold or silver. The old English phrase “cold, hard cash” refers to this.
People distinguished between “hard” metal coins and “soft” paper money because metallic coins are solid, physical tokens with intrinsic economic value independent of their monetary status. On the other hand, paper fiat currency only represents a promise to pay the bearer in physical money upon redemption.
Nowadays, “Hard Money” loans are loans that are not based on the borrower's credit score but rather on the asset's value being used as collateral, making the term “Hard Money” seem outdated. However, the phrase is still helpful, especially if you're a property developer or landlord looking to extend your portfolio.
How Do Hard Money Loans Work?
A hard money loan is a short-term loan secured by real estate. Private investors or companies typically issue hard money loans. Hard money lenders typically focus on the property's value as collateral, not on the borrower's creditworthiness.
Investors use the loans to purchase, refurbish, or refinance properties, and they are usually for a shorter term than traditional loans, such as 12 months. Interest rates can be as high as 15%, but they are often 12% to 25% depending on the lender and the economic climate.
There are advantages to securing a hard money loan. One advantage is that hard money loans can be approved quickly, often as little as 24 hours. Quick approval can be helpful if you need to secure funding fast for an emergency or opportunity.
Another advantage is that hard money loans can be used for various purposes that are beyond the remit of conventional lenders, including business expansion, renovation projects, or even refinancing other loans.
However, there are also some disadvantages to taking out a hard money loan. One of the most significant disadvantages is that hard money loans have high-interest rates. High interest means that you will likely end up paying more in interest over the life of the loan than you would with a traditional loan.
Additionally, hard money loans are often for shorter terms than traditional loans, so you will need to repay the loan much sooner. Early paybacks can be difficult if you cannot generate enough revenue quickly to make the payments.
Before taking out a hard money loan, it's vital to understand both the advantages and disadvantages or the pros and cons. Weighing these factors will help you decide if borrowing hard money is suitable for your situation.
-Hard Money Loans can be approved quickly, often in as little as 24 hours.
-Can be used for a variety of purposes, including business expansion or refinancing other loans.
-In contrast to traditional loans, you do not need to pre-qualify for specific loan amounts calculations are based on value rather than credit score.
-Hard Money Loans have high-interest rates, which could end up costing more in the long run.
-Loans are often for shorter terms, which means repayment is much sooner than traditional loans, which could be problematic.
-Borrowers may be required to provide additional collateral to secure the loan.
Hard money loans are not based on the borrower's credit score but rather on the value of the asset being used as collateral; you can access money quickly.
Hard money loans have advantages, and flexibility is one of them. Flexibility means that the amount you can borrow could be more than a traditional loan or mortgage.
Other advantages include quick approval, and loans can be used for various purposes, while, as we have said before, disadvantages include high-interest rates and short terms.
You may need to provide additional collateral or guarantees to secure the loan in some cases. Still, the general rule is that arrangements are evaluated on an individual basis or case-by-case scenario.
Professionals in your specific field usually handle hard money loans. They understand your requirements. Usually, you deal with an individual or a private company rather than a bank with a strict policy or “computer says no” attitude.
Finally – before taking out a hard money loan, it's important to understand both the advantages and disadvantages or the pros and cons. Always speak to a professional financial advisor who is part of a professional body such as the American Association of Private Lenders.
Weighing these factors will help you decide if borrowing hard money is right for your situation.