The process of borrowing money can get very complicated. Whether it’s borrowing money to buy a house or to start a business there are many different avenues that you can go down. The regular bank lending process is when a bank verifies you have income and good credit and then loans you the money. Typically on some type of repayment plan with interest. Hard money loans are similar except it is better equipped for people who don’t have proof of income or good credit. This is why the real estate business is perfect for hard money lending.
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Where the Money Comes From
The biggest difference between other types of loans and hard money lending is the place where the money comes from. Typically, loans come from a bank that also does many other types of loans and many other types of transactions. They have a wider array of business transactions so they have less risk in their business. They typically give better interest rates. When some businesses are starting out they may be eligible for grants. Which are not needed to repay back. People may also be able to lean on family members or friends to invest. Which also doesn’t require re-payment.
Hard money loans typically come from an institution that only does hard money loans. Hard money loans are much riskier and have more interest. Along with that the requirements of a hard money loan are a little different. They require less money down but higher interest. Hard money loans are great for self employed people who do not necessarily have a strong proof of income. House flippers love hard money loans.
Loan Return Plan
The loan return plan on a hard money loan is quite a bit different. The interest is higher so the cost is higher. Hard money lenders also typically like to see their money back faster. So the payment is higher because of that. Hard money loans are typically used for riskier businesses such as real estate. There is always a chance that they won’t see their money back because the market could crash or the house doesn’t re-sell. All of these extra risks make the loan a little more expensive. The loan return plan is typically faster as well. They like to see their money back within 4 to 5 years rather than a classic home mortgage of 15 or 30 years.
The most common difference between hard money lending and regular lending is what the money is going to be used for. Hard money loans are best for a business where the money is going to be quickly returned. This is why the real estate home flippers love it. They get fast cash quickly to start the project and then repay the cash. Hopefully keeping a little profit.
Hard money loans are not a good option for loans that you don’t intend on paying back quickly. You will lose a lot of money in interest and fees. The hard money loans were intended for fast cash with fast repayment.
Although the process is somewhat similar there are many differences between hard money loans and regular loans. Hard money loans have a particular purpose typically set for certain businesses and certain purposes. They have different return loan plans and are typically a little more expensive. Hard money loans also come from different sources. Where as typical loans come from a bank a hard money loan is typically from an institution. These differences are what keep banking interesting and give you a tough decision next time you are needing some extra cash.