How do Hard Money Loans Work?

Most people who have never taken hard money loans are tempted to think that these are quick and easy business deals that you can use to get hard cash. While these people are not necessarily wrong, there is more to hard loans than just that. Read more to learn about hard loans and how they work.

What are Hard Money Loans?

A hard money loan is a non-conforming loan that is obtained from non-traditional sources. This means that you will likely get a hard money loan from private lenders that accept property or an asset as security. Most people tend to go for hard money loans when they fail to get a loan or mortgage approved. Some people will also opt for them if they are not interested in waiting out the lengthy process of getting approved for conventional loans. Hard money loans are secured, and that’s where the term “hard” comes from. It essentially refers to the physical assets that will be held as collateral for the loan.

Length of Payment Period

In most instances, you will be required to pay back a hard money loan within half a year or sometimes within 24 months. Because of this, these loans are perfect for investors working with short-term investments. For instance, a real estate investor who can buy and spin a house within six months can take a hard money loan. It’s important to note that if you fail to pay back the hard money loan in the agreed-upon period, there is a risk that you might lose the property you would have used as collateral.

What are the Interest Rates for Hard Money Loans?

In most instances, hard money loans come with high-interest rates. Generally, the interest rates for these loans are around 7-15 percent. The reason behind this is that hard money loans are more of a risk for the lender than conventional loans. This is because hard money lenders don’t require the same level of arduous vetting that traditional lenders require. For this reason, the loans are available to individuals with poor credit too, who are classified as high-risk borrowers.

These are some of the things you need to know about hard money loans. You also need to know that you can only use non-owner-occupied properties as collateral. Apart from these differences, hard money loans are similar in many ways to traditional loans.

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