Hard Loans Overview. January 13
Hard loans are often depicted as shady loans like those made by loan sharks in gangster movies, but that is usually not a fair or accurate portrayal. The majority of hard loans are offered by legitimate major banks and mortgage lenders in order to help consumers who have special financial needs that are not covered by traditional types of loans.
For instance, if you approach your bank for a loan to build a million-dollar office building on a vacant lot worth only $25,000, the bank may be reluctant to lend you the funds. That is because the only thing that secures the loan is a piece of land. If you fail to pay, the bank will be unable to recover their million dollars by selling off the land. They do not want to assume the extra risk, so you will probably have your loan application rejected.
But hard money lenders are those companies or private investors who specialize in lending money to people in risky or “hard” situations. You might, for example, require a hard money loan if you have bad credit, if you need money within just a few days instead of the normal 4-6 weeks, or if you want to borrow but cannot put up any valuable collateral. In exchange for assuming the higher risk, the lender will charge you higher than normal interest, and that is how hard money lenders make a profit.
Hard money loans are often used for commercial purposes like real estate development or starting or expanding a business. If you borrow with this type of loan you can expect to pay interest that is at least 2-3 percent points higher – and in some cases, much higher than that – compared to a typical bank loan.