In simple words, hard money loans are short-term loans which are given to the borrower by some private institution or individuals. These types of loan are most common in the rural areas as they don’t trust the bank much or the bank refuse to give them loan.
Though there are some risks involved in hard money loans as well as some benefits. There are some pros and cons about hard money loans which are as follows:
There are three main pros of hard money loans. They are:
1 Speedy process
Loans at banks take a lot of time with their procedure and paperwork. But getting hard money loan means a speedy procedure. You can get loan in an hour as well through the hard money loan. There is not much of the paperwork involved, just the paperwork of the property or land or gold is given as a leverage to the money lender.
After the leverage is given, the borrower can receive the amount of money decided by both the borrower and lender instantly. So, you can get a hard money loan in a short amount of time.
Every money lender has their own criteria about lending money based on real estate. Though these money loans don’t come with a lot of restrictions as the bank loans do. So, these kinds of money loans are pliable or should we say flexible in nature.
Money lenders require some of the leverage from the borrower in exchange for the money. For small amount of money, they might or might not require leverage. But for a big amount of money, the leverage is must and important for the money lender as their own safe guard if the loan is not paid off.
There are three main cons of hard money loans. They are:
1 Rate of interest
The rate of interest for the principal money is higher than that of the bank loans or credit unions. For example, if the rate of interest in bank for loans is 10% then the hard money loan lender will charge 13-14% of interest for the same amount of money. So, the borrower has to pay more money to lender than they would have to the banks.
2 High chance of risk
As we all know that hard money loans come with its own risks. Due to the high rate of interest and the loan being short term, the borrower becomes financially burdened by it. He is not able to pay off the loan sometimes and loses their leverage in return.
3 Paid in the given time
The time period is not extended by the money lender for the hard money loan even if the amount is high. In return many of the borrowers lose their lands, property, gold, etc.
There are some pros as well as cons to hard money loans. But sometimes the cons overpower the pros of this type of loans. So, keep these both in mind when you are in need to loan. Think of all the advantages and disadvantages you might face if you are getting a loan from a private money lender.