Hard money lending is a type of financing in which a borrower receives a short-term loan secured by real property. Investors typically use this type of lending to finance the purchase and renovation of commercial real estate properties. (View another definition of hard money loans)
Benefits of hard money loans
One of the main benefits of hard money lending is that it is often easier to qualify for than traditional bank financing. Because the property’s value secures the loan, lenders may be more flexible with their lending criteria. This makes it a good option for borrowers who may not be able to qualify for a traditional loan due to bad credit or a lack of collateral.
Another benefit of hard money lending is that it is a fast and efficient way to access capital. Unlike traditional bank loans, which can take weeks or even months to process, hard money loans can be approved and funded in days. This is especially beneficial for investors who must act quickly to secure a property or take advantage of a time-sensitive investment opportunity.
Drawbacks of hard money loans
Despite these advantages, there are also some drawbacks to hard money lending. For one, the interest rates on these loans are typically higher than those on traditional loans. This is because hard money lenders take on more risk and must charge a higher rate to compensate for this. Borrowers should carefully consider the total cost of the loan, including both the interest rate and any origination fees, before committing to a hard money loan.
Other things to consider
Most hard money loans have a repayment period of one to three years, after which the borrower must either refinance the loan or pay it off in full.
Overall, hard money lending can be a valuable tool for investors in the commercial real estate space. It offers a quick and efficient way to access capital and can be a good option for borrowers who may not qualify for traditional financing. However, borrowers should be aware of the potential drawbacks of a hard money loan, including higher interest rates and shorter repayment terms, and carefully consider the total cost of the loan before committing to a hard money loan.