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When you have cash constraints and you are looking for ways of financing an investment or dealing with an emergency, it is common to look for solutions which allow easier access to money than the traditional mortgage lenders. Hard money loans are one of the most effective of these ways of borrowing money. These are loans which are typically secured by assets such as real estate property and they are normally processed much faster than the traditional mortgage loans. Here are a few of the important things that you need to know about hard money loans, how they are different from small business loans, and their pros and cons.
Differences between traditional and hard money loans
When you are looking for a traditional loan, the lender uses a number of criteria to determine whether you qualify or not. They may look into your credit scores and ask for guarantors. The lenders will also look into your borrowing history, work history, and even criminal records to see whether you fit the traditional frame of a good candidate for the loan. In addition to that, they may also look into your debt to income ratio and ask you for guarantors. These are processes which can be painfully wrong and, in some situations, you end up without any help. Hard money lenders take a completely different approach, instead of asking about the credit history, they will ask for a collateral for the loan and in case you are unable to repay the loan, they will use the collateral as security.
There are certain emergency situations which lead to the need for a fast access to money. At other times, the need may or may not be an emergency, but you do not have the needed threshold to qualify for the traditional loan. When this happens, you have to think out of the box, and hard loans come in handy because:
· You get the money you need with a turnaround time of less than 24 hours.
· You get as much money as the appraised value of the collateral that you put in place before getting the loan.
· You do not have to go through the painful process of submitting endless paperwork and getting guarantors to undersign for you.
· Because of the short repayment periods of less than five years, you do not get hefty interest rates to pay for extended periods.
When you are able to repay these loans on time, they are the perfect solution to emergency financial problems. However, there is also another side of the coin that you should always think about.
· The biggest drawback that comes from borrowing a hard money loan is that in case everything you are planning does not go according to plan and you are unable to make your payments on time, you will end up losing the collateral. Therefore, everything has to work according to plan for the loan to make sense.
· The loans are really expensive when compared to mortgage loans. Their interest rates are massive.
· If the property needs repairs and rehabilitation, you could be denied the loan.
However, if you are sure about the venture that is taking you to the hard money lenders, there is absolutely no reason why you should not think about getting them to help you with the cash that you need. You just need to make sure that you have a backup plan to repay the loan in case the main plan does not start bringing the profits that you have projected it will bring in on time to repay the loan. When handled properly, these loans do not even have to create a negative dent on your credit record at all.
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