What Is a Hard Money Loan? The Basics Explained

Interest rates for loans are at a historic low right now. According to the most recent data put out by the Federal Reserve, the average interest rate for a personal loan is down to 9.34%.

If you are thinking of borrowing money, you have many options. One of these is a hard money loan. But what is a hard money loan? This guide will answer all of your questions.

What Is a Hard Money Loan?

A hard money loan is a loan from a private lender rather than a traditional governmentally regulated financial institution. These loans are backed by a hard piece of valuable collateral such as a property.

In the event of the borrower not being able to pay back the loan in full, the asset is seized by the lender and transferred into their possession.

Hard money loans are becoming the norm for home-flippers who can’t borrow from traditional lending institutions. They are regulated more loosely than traditional loans or home mortgages.

Pros and Cons of Hard Money Loans

Hard money loans have their own inherent set of advantages and disadvantages. An advantage of hard money loans is that they require no credit checks or analysis of credit history. This makes getting hard money loans much faster than traditional loans.

Hard money loans can also be flexible. This depends entirely on the lending party and the terms that the borrower has negotiated. Each hard money loan is different.  When compared to a corporate-governed loan such as a bank they are often far more flexible.

There is also no approval process for a hard money loan. This allows a wider pool of applicants to apply for one.

There are also a host of cons that come along with getting a hard money loan. The first of these is that hard money loans tend to be more expensive for the borrowing party. This includes higher interest rates as well as fees.

It also may be hard to find a hard money lender who is willing to give you a loan. Another disadvantage is that if you can no longer pay back your loan, your assets are immediately confiscated. There is no grace period or re-financing like with a bank.

Before contemplating a hard money loan it is important to learn more about the disadvantages to make sure you are prepared to take one on. There is nothing worse than losing a house or property because you didn’t do proper research.

You Have Options

Regardless of if you choose a traditional loan from a government-backed financial institution, or settle for a hard money loan you have a lot of options. Doing proper research is an important first step.

Asking yourself “what is a hard money loan?” is an excellent start to your exploration of what loans work best for your needs.  The last thing you want is to be caught off guard by some financial nuance you didn’t expect.

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