Before knowing how the hard money loans work, first learns learn and know what hard money loans are.
What are Hard Money Loans?
To put it simply, hard money loans are short-term loans given by private institutions or individuals. These hard money loans are mostly funded by private investors or fund of the investors. But when you first hear but hard money loan, then you definitely think about some shady people conducting their business in shady places and what not.
Though in some previous years there were some bad people who has tarnished the name of the hard money loans. They would even go to some extreme measure to collect their money back if not returned by the lender. But over the years the hard money loans have developed and has less risks than it was before.
These people you lend you hard money loans are not banks or some credit unions, they are private individuals who give money to those in need without all the bank type paperwork for it. Mostly these loans are given for around 12 months (1 year) but this time period can be increased up to 2 to 5 years as well. Though the borrower has to make a monthly payment every month which requires the interest of the principal amount given to the lender.
Many times, people go to the bank for loan but they say ‘No’, in situations like this they turn to private institutions such as money lender for help. Though hard money loans can be given based on some of their assets as well. Most of times the rate of interest on the principal amount is more than the bank gives you. So, you have to pay a little more to the money lender than you would have to the banks or credit unions.
Types of Hard Money Loans:
There are three main types of hard money loans which the lender gives. These are the most common types of loans you will see. They are as follows:
- Property Loans
These types of loans are given to the borrower in exchange of any of their property. The borrower gives their small office, or small residential home, commercial place, etc. to the lender to keep until the loan is paid off by them. These kinds of loans are mostly high amount as property is involved.
The property is like a safety guard for the money lenders that if the borrower is not able to pay off the loan then automatically the property belongs to the money lender.
- Land Loans
These types of loans are mostly given to the farmers. The farmers (borrower) get a loan from the money lenders in exchange of a piece of their land. The land will be like a reassurance for the money lender if the borrower is not able to pay off the hard money loan then the land becomes that of the money lender. These kinds of loans are most common in the village areas.
- Gold loans
These types of loans are given in exchange for the gold or jewelry. The borrower gives their jewelry as a leverage in exchange for the loan. These are also the most common types of loan in the village areas.
So, this is the way hard money loans work. Though there are some risks involved but in today’s situation, the risks have lessened a lot.