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You want to flip a house, but you don’t have enough money for a down payment — and your credit isn’t where it needs to be for a personal loan. Or, maybe you’re a small business owner who wants to own a piece of commercial real estate. People who are investing in real estate beyond their primary residence may consider a hard money loan as an option, especially if a traditional mortgage isn’t available.
A hard money loan is a short-term loan commonly used by investors, such as house flippers or developers, who renovate properties to sell. The loan typically uses the property as collateral. Hard money loans are usually funded by private lenders, individuals, or investor groups, rather than banks.
A hard money loan may make sense on paper, but because it typically has a shorter term than other types of loans, and interest rates can be high, paying back the loan can be challenging. Defaulting on a hard money loan could mean losing the collateral property.
Key Points
• Hard money personal loans are short-term loans secured by property, primarily used by investors like house flippers, and funded by private lenders instead of banks.
• These loans typically have higher interest rates and shorter payback periods than traditional mortgages, making repayment potentially challenging and risky.
• Approval for hard money loans can be quicker and less stringent regarding credit scores compared to traditional loans, benefiting those with limited credit histories.
• Weighing the pros and cons, including the potential high costs and risk of losing the collateral property, before pursuing a hard money loan is a wise move.
• Alternatives to hard money loans include personal loans, credit cards, or home equity lines of credit (HELOCs), each with distinct benefits and risks based on individual financial situations.
What Is a Hard Money Personal Loan?
A hard money loan is a type of personal loan that uses collateral. While a mortgage is also a type of loan that uses property as collateral, a hard money loan is very different.
First of all, a hard money loan doesn’t come from a bank. It comes from a private lender, which may be a company or an individual. The loan will likely have a higher interest rate and a shorter payback period than a traditional mortgage.
The approval process can be much shorter for a hard money loan. While a mortgage may take weeks for approval, it’s not unusual to have cash in hand within a few days of a hard money loan application.
A hard money loan may be more lenient in terms of credit scores or assets than a traditional loan. This can be beneficial for people who want to flip a house or buy an additional piece of property, who may not have enough assets on paper to be approved for a traditional mortgage, or who need a larger down payment than they have.
How Do Hard Money Personal Loans Work?
Hard money personal loans are often advertised to — and used as a tool for — house flippers, but other people may pursue a hard money personal loan as well.
Let’s say someone wants to buy a house to flip, or a piece of land to use as a rental property. They may still be building their credit, or they may not have enough money for a down payment. They may have been turned down for a mortgage, or they may not want to apply for a mortgage, knowing that it’s a time-intensive process and their finances might not be as strong on paper as the bank would like.
In this case, the person might turn to a hard money personal loan. Individuals, groups of investors, or private companies may specialize in offering hard money loans. Terms vary but are often less than one year, compared to 20 or more years for a mortgage. But there is one constant: If you can’t pay back the loan, you lose the collateral, which would be the property.
Other things to be aware of regarding a hard money personal loan: Interest rates may be high, and the loan term is much shorter than a mortgage. This comes with a fair amount of risk.
Pros and Cons of Hard Money Personal Loans
As with any personal loan, it’s important to consider the pros and cons of the loan. It can also be a good idea to consider what-ifs and how you might pay back the money if the original plan doesn’t work. Here are some pros and cons to think about before applying for a hard money personal loan.
| Pros of a hard money personal loan | Cons of a hard money personal loan |
|---|---|
| Receive money fast | Short loan payback period |
| Flexibility in terms of credit score and overall financial picture | High interest rates |
| Can be used for whatever you need the money for | Possible loss of property if the terms of the loan are not fulfilled |
Personal Loans vs Hard Money Personal Loans
The primary difference between an unsecured personal loan and a hard money personal loan is that a hard money loan is secured. Both are personal loans, but using collateral for a personal loan means the loan is secured.
Collateral can be anything of value. But in the case of a hard money loan, it’s in the form of property. A personal loan typically does not require collateral. If you were unable to pay back an unsecured personal loan, the lender could not immediately take away your house. Both types of personal loans have specific terms and conditions, and both can provide cash relatively quickly. However, many unsecured personal loans are backed by a bank or other financial institution.
| Hard money personal loans | Unsecured personal loans |
|---|---|
| Backed by a private individual or company | Backed by a bank or other financial institution |
| Credit checks and financial picture play a limited role in approval | Credit checks play a large role in approval |
| Provides cash | Provides cash |
Is a Hard Money Personal Loan Right for You?
Hard money personal loans may be an option for certain financial needs. But, as with any personal loan, it’s important to weigh the pros and cons, and consider what-ifs. Questions to ask may include:
• What other avenues can I follow to raise the money I need?
• What happens if I don’t pursue this loan?
• If I get this loan for a specific thing, what happens if it doesn’t work out the way I anticipated?
• Can I afford this loan, including interest?
• Could I afford this loan if my financial circumstances changed?
These questions can help you assess worst-case scenarios. You also may want to ask your potential lender any questions you have as well.
Hard Money Personal Loan Alternatives
There are potential alternatives to hard money personal loans. Some may require collateral, and others, like an unsecured personal loan, may not. Each comes with pros and cons. Your financial situation may also determine which loans you might be eligible for. If you’re building your credit, you may not be able to access certain loans.
Credit Cards
If you’re purchasing land or property, you likely need cash. But for other purchases, using a credit card could be an option. A credit card may work well for making periodic purchases but can be riskier when you’re looking for a large lump sum.
However, credit cards may have high, variable interest rates. Plus, the more of your available credit you use, the higher your credit utilization ratio, which could impact your credit score.
Recommended: What Is A Personal Line of Credit & How Do You Get One?
Unsecured Personal Loans
Can you buy land with an unsecured personal loan? You could. Generally, once you’re approved for a personal loan, you receive money in your account and can then use it for virtually any purpose. Some people use personal loans to buy land, pay for renovations, or other home improvement projects.
Keep in mind that an unsecured personal loan generally can’t be used for a down payment. And a personal loan may affect mortgage eligibility.
HELOCs
A HELOC is a type of revolving debt. For example, if you apply for a HELOC and are approved for $10,000, you can draw up to $10,000. Once that money is paid back, you can draw from it again for the set period of time defined in the terms of the loan.
A HELOC is a popular option for people who are doing home improvement projects. They may not need a lump sum of cash but may have ongoing expenses. Generally, interest rates on a HELOC are variable, not fixed.
Since a HELOC is a loan secured by the borrower’s home, there is a risk of losing the home if the loan is not repaid.
The Takeaway
For some people, hard money personal loans can help them achieve their real estate goals. But they typically have high interest rates and short payback periods, which can make them risky. It can be a good idea to carefully weigh the pros and cons of a hard personal money loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Do you need collateral for a hard money personal loan?
A hard money personal loan typically uses property as collateral. This could make obtaining financing easier for those with limited credit scores.
What are the typical interest rates on a hard money personal loan?
This type of loan typically has a higher interest rate and shorter payback period than a traditional mortgage. It also includes the possibility of losing property if you cannot fulfill the terms of the loan.
What are the alternatives to hard money personal loans?
There are potential alternatives to hard money personal loans, such as credit cards, personal loans, or HELOCs. Each of these alternatives has pros and cons to consider carefully.
Do banks offer hard money personal loans?
Hard money personal loans are funded by private lenders, individuals, or investor groups. They are not usually available from banks.
Photo credit: iStock/JLco – Julia Amaral
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