When I first heard the term hard money lender I thought it meant a lender who unfairly charges excessive fees. While some may think that is true, there are laws against usury, which is charging ridiculously high interest rates. Don’t all lenders charge high interest rates? Some people think so but hard money lenders charge even more because they are not required to conform to banking standards.
Wait a minute. What are hard money lenders in the first place? They are companies that offer loans based on real-estate. These lenders use real estate as collateral to offer short-term loans. Sometimes they may accept other personal or business collateral instead of real estate.
Isn’t using real estate as collateral for a short-term loan risky? Of course it is. However, hard money loans may be the only option for individuals or businesses who cannot obtain traditional loans because of credit or other issues.
These types of loans have been called “last resort” loans. In these economically challenging times, they are sometimes the last hope for desperate people.
Why do they do this? Some see hard money lenders as monsters who take advantage of people in desperate situations. This is due to the high interest rates they typically charge. Others see them as a light at the end of the tunnel. While they do charge high interest rates, the rates can be justified by the fact that they offer loans to people who they know may not be able to pay them back. They usually have a high default rate.
So are they bad? There is a smart way to go about borrowing from a hard money lender. Do not use one of these loans unless it is absolutely necessary. Make sure all other options are completely exhausted before even considering one.
If you are in a desperate situation and have no other options, a hard money loan may be the way out.
There is a time and place for using hard money lenders. For more information read about the advantages of using hard money loans which covers strategies when it may be appropriate to use hard money.
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