The inability to make ends meet limits many people from saving and being able to acquire property, invest or make meaningful plans for their future.
If your credit score is not where a traditional lender expects it to be, you will most likely not be granted a loan. However it is always important to check your credit rating before resorting to a hard money loan.
When people find themselves boxed in a corner with the inability to repay these loans, and being faced with a bad credit record yet needing more financial assistance to meet their long and short term goals, they now have no choice but to resort to hard money loans using their collateral to secure such loans.
What is a collateral hard money loan?
This is an asset a lender accepts as security for giving out a loan.
It is a short-term loan based mainly on the value of the collateral and not on the individual’s credit worthiness.
This is a huge risk on the part of the borrower because if they default in repaying the loan, the collateral can be sold by the lender to recover the loan amount thereby cutting his losses.
These loans are usually obtained from individuals or private companies with each having their own criteria.
One important requirement for a collateral hard money loan is having the down payment or having the equity in a property to use as down payment. This usually ranges from 25 to 30% for residential properties and 30 to 40% for commercial properties.
Examples of collateral hard money loans include:
Mortgage propertyCarInvestment accountsEquipment
It is very common practice for home shoppers, rental property investors and business owners to take a hard money loan.
Factors to consider before taking a collateral hard money loan include but are not limited to the following;
Your incomeYour credit scoreYour monthly debt repayment The amount of debt you owe to other lendersThe size of your down payment
In as much as there are factors to be considered before taking out a collateral hard money loan, we must also consider which hard money lender we must use and what should inform our decision.
Even though each lender has its own criteria in terms of interest rates, some also consider the property or collateral in question. If it is a property, Is it residential or commercial,? The location of the property, and if the lender is basing the property as it is or the loan on the property value after renovation.
The loan repayment requirement is very important in choosing a collateral hard money lender. Here we will examine if the lender is charging an accrued interest with a balloon payment, interest only for the life of the loan or hybrid.
Accrued interest with balloon payment
Here the interest accrues and rolls into the balance
Interest only
Only the interest is paid monthly. The principal remains the same and will be paid off at the end of the term.
Hybrid
A mix of both accrued interest and interest only.
Other factors to take into consideration when choosing a collateral hard money lender is the interest rate and support. Do they help you in negotiating your deal.
Pros of hard money loans
You can get loans approved quickerThere are less stringent approval processesFlexible as it can be negotiated;Convenient as there is no middleman, no bank statements and paperwork;
Cons of hard money loans
High-interest ratesHas a shorter term than traditional loansLThe lenderrequires a higher down payment;Higher than fixed rates for mortgage loans
Conclusion
Whilst we may consider hard money loans as a last resort we must always factor in the risks involved and our plans to repay the loan without the risk of losing our collateral.
Some alternatives we may consider before opting out for a collateral hard money loan may include family and friends, financing from the property seller, home equity loans, and traditional mortgages.
Are collateral hard money loans referred to as loans of last resort?
Yes, because the borrower can no longer qualify to get loans from traditional lenders like the banks and have to get money from individuals and private institutions.
Is the interest rate higher for hard money loans?
Yes. They usually offer high-interest rates.
Why is collateral hard money loans risky?
They are risky because if you default you can easily lose your collateral as the title documents are usually with the lender.
Are hard money loans legal?
They are unregulated by state and federal laws.
What will a lender consider as good collateral?
It must be cost-effective;Easy to use; andEasy to liquidate.
