Home Finance Are Hard Money Loans a Good Idea?

Are Hard Money Loans a Good Idea?

One of the most commonly searched questions about hard money is this: are hard money loans a good idea? People who see the world through a strictly black and white lens are able to answer this question in absolute terms. On one side are those who say absolutely not. On the other side are those who say hard money loans are always good. The truth is somewhere in the middle.

Actium Partners, a Salt Lake City hard money lender with a special interest in real estate, says that hard money loans are neither good nor bad in and of themselves. They are a financial tool no different from any other type of lending. What makes them good or bad is how they are utilized.

Good and Bad Lenders

Borrowers need to understand that there are both good and bad lenders. This is as true in the traditional financing sector as it is in hard money. Borrowers can run into trouble with bad lenders whether they borrow from a bank, a private lender, or a hard money provider.

The best way to avoid a bad lender is to do your due diligence. Look at lenders in terms of their time in business, their track records, reports from organizations like the BBB, and even online reviews. There is enough information available online to get a good idea of how trustworthy lenders might be.

Hard money lenders are often characterized by the media as being shady. It is a reputation they do not deserve. The vast majority of them are reputable business owners who treat their customers fairly. Yes, there are bad apples in the hard money industry. But there are also bad apples in banking and private lending.

Appropriate and Inappropriate Needs

Another thing to consider about hard money is the need for which it is being considered. Just like there are good and bad lenders, there are appropriate and inappropriate needs. Borrowers have to ask themselves why they need to borrow and whether or not their need justifies the risks that come with hard money.

For example, consider a real estate investor looking to close on a property that has garnered interest from several other competitors. The seller is likely to go with the deal that closes the quickest. This is one of the scenarios in which hard money shines. Hard money lenders can approve and fund loans in a matter of days.

This is a legitimate need for the simple fact that the investment will pay for itself in short order. Income generated by the investment property virtually guarantees the borrower will have the means to pay off the loan on its maturity date.

Hard Money Approved on Collateral

What many hard money borrowers tend to neglect is collateral. They do not neglect it in the sense that they fail to provide sufficient collateral to secure a loan, they neglect it in the sense that they don’t consider the potential of losing it. Remember that hard money loans are approved primarily on the value of the borrower’s collateral.

Hard money lenders are not afraid to repossess collateral in the event of default. It is not what they want to do – no lender wants to go through that hassle – but they will do it if necessary. Borrowers have to be sure they are willing to lose that collateral if they choose to apply for hard money.

Hard money loans are neither good nor bad. They are neutral. Do not believe all the bad press hard money gets. On the other hand, do not assume that hard money is appropriate for every situation.

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