Do You Know the Main Characteristics of a Hard Money Loan?
Hard money lending is a mysterious creature to most of us. Because it targets a limited audience, the typical American consumer will never have an opportunity to interact with hard money lenders. Thus, they may never learn how hard money actually works.
How about you? Do you know the main characteristics of hard money? Do you know how it differs from conventional lending? If not, this post should give you a basic understanding. There is plenty more information online if you would like to research hard money in detail. In the meantime, check out hard money’s main characteristics below.
1. Short Term by Design
Hard money loans are intentionally designed to be short-term. For that reason, they are sometimes misunderstood as being the same as bridge loans. This post will not get into that, but we do need to look at why hard money loans come with such short terms. How short? Generally between 6 and 36 months.
Hard money lenders are private lenders willing to take substantial risk in exchange for short-term gain. Their risks are high enough that they are not willing to lend for 10, 15, or 30 years. They want to get in and out as quickly as possible. That’s why the average hard money loan comes with a term of no more than two years.
2. Interest Rates Are Higher
It is normal for interest rates on hard money loans to be several points higher than rates on conventional loans. Double-digit interest rates are not out of the question. Why is this? We are back to risk again. Hard money loans are risky loans. Lenders try to offset some of the risk they accept by charging higher rates.
You also need to remember that shorter terms mean lenders have less time to make their money. Higher rates make up for that, to some degree.
3. Asset-Based Lending
Another key aspect of hard money lending is that it is asset-based. Whereas banks generally rely on the customer’s good faith and credit to ensure loans are paid back, hard money lenders require a bit more. They require a hard asset as collateral. That’s where the name comes from.
Actium Partners is a Salt Lake City, Utah hard money lender that specializes in commercial properties. They say that, more often than not, the property a borrower is attempting to obtain acts as the collateral on the loan.
4. Fast Approval and Funding
Hard money loans have a reputation for offering fast approval and funding. It is a well-earned reputation, to a point. For instance, a real estate investor can get a hard money loan from Actium faster than a conventional bank loan. But a car buyer can get an auto loan faster than a hard money loan. So it’s a matter of comparison.
Be that as it may, hard money lenders aren’t bound to the same rules that apply to banks. They can approve based on assets alone. Therefore, they don’t tend to have complicated approval processes. They do not have to review tons of documents, run credit checks, or do most of the other things banks do.
Turnaround time for hard money is usually a couple of days. In an emergency, 24-hour turnaround is not unheard of. Hard money lenders can make it happen if they need to.
As you can see, hard money lending is quite a bit different than conventional lending. It is the right choice for certain types of financial needs. However, it’s not right for every situation. That’s why hard money lenders are very choosy about the projects they fund.