Home Finance Why Hard Money Loans Are Often Worth the Higher Interest Rates

Why Hard Money Loans Are Often Worth the Higher Interest Rates

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Financial experts with an aversion to hard money tend to cite high interest rates as the number one reason to avoid hard money loans. They point out that borrowers can get much better rates through traditional bank loans. That much is true. However, there are a number of reasons hard money loans are worth paying higher interest on.

Interest rates are not everything. In fact, they are but one component of the borrowing scenario. Borrowers need to consider a few additional things before determining the type of loan that best suits their needs.

Hard Money Is Fast Money

There is no doubt that hard money lenders charge higher interest rates. They need to in order to make a decent profit and mitigate their risks. But in exchange, they offer a lot. At the top of the list is speedy approval and funding. As Salt Lake City’s Actium Partners like to say, hard money is fast money.

Hard money loans rely on collateral for their security. As such, lenders don’t have to spend a lot of time researching a borrower’s financial position. If the combination of collateral value and borrower down payment exceed the desired loan amount, approval can be granted – often in a matter of days.

When time is of the essence, you cannot beat the speed hard money lenders bring to the table. It is no coincidence that the vast majority of hard money borrowers are real estate investors. Their business is a time sensitive one. They cannot wait around for banks to do what they do.

Terms Are Extremely Short

Despite higher interest rates, hard money loans come with extremely short terms. On average, a hard money loan runs for 6-12 months. That is not long compared to a 30-year loan from a bank. The shorter terms offer borrowers some definite advantages.

First and foremost, shorter terms can ultimately mean less total interest paid. The right interest rate and term combination could mean the total cost of a hard money loan is actually lower than a bank loan.

Even when that is not the case, obtaining a short-term loan can help a borrower meet immediate financing needs without tying up money for years on end. Some borrowers prefer to get in and out in 12 months or less. They just don’t like tying up money for 5, 10, or 20 years.

Document Requirements Are Minimal

Paying a higher interest rate is often worth it for borrowers uninterested in jumping through the documentation hoops associated with bank loans. In order to protect themselves, banks require all sorts of documents ranging from P & L statements to tax records. Fulfilling their document requirements can be a full-time job all by itself.

By comparison, hard money requirements are minimal. Borrowers submit a limited number of documents with their applications and that’s it. They are not contacted three months down the road by lenders looking for additional documents.

Approval Is Based on Collateral

Finally, the biggest thing many hard money borrowers have going for them is their collateral. They have access to assets they can put up as backing for the loans they seek. When a borrower has the right collateral, approval is rarely a problem. That assurance is worth paying a little bit extra for.

Telling borrowers to stay away from hard money based solely on higher interest rates reveals a lack of knowledge about the benefits hard money offers. Hard money is not for everyone. But for a lot of borrowers, it is the only way to go. Higher interest rates are well worth what they get in return.

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