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What are Hard Money Loans?

Malcolm Tatum
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Updated: May 17, 2024
Views: 3,219
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Hard money loans are a form of asset-based lending that involves the use of an asset owned by the borrower to secure the debt. In many cases, the process involves the creation of a trust deed to secure the loan. For the most part, a hard money loan is issued by lenders other than commercial banks.

Private investors sometimes issue hard money loans. Because the loans typically carry a higher rate of interest, there is the opportunity to realize an excellent return from extending loans of this type to individuals who do not qualify for commercial bank loans. While the borrower may be considered something of a credit risk, the fact that the loan is secured with a hard money asset such as a piece of property does protect the lender in the event of a default on the loan.

There are several instances where a hard money personal loan may be helpful. A loan of this type may be extended to an individual who is in danger of losing a home or who is trying to launch a new business but does not have enough background or assets to secure the loan from a bank. A private investor can step in, provide the funds needed through a loan agreement, and arrange repayment terms with the borrower.

One of the key factors in issuing hard money loans is that the credit score of the borrower is of less importance than with more traditional loans. Instead, the focus is on the value of the asset that is used to secure the loan. This creates a situation where even if the borrower has poor credit, he or she may still qualify for a hard money personal loan, if the appraised value of the property is sufficient to satisfy the lender.

It is important to remember that lenders usually provide loans that are a percentage of the appraised value of the asset used to secure the hard money loans. For example, if the property used to secure the loan is worth $200,000, the lender may extend a loan up to $140,000. While there are exceptions, private lenders generally lend no more than 70% of the appraised value of the secured property.

Hard money loans can be structured in a number of ways. Hard money commercial loans are a lot like individual hard money loans, but often carry a higher rate of interest since there is more risk to the lender. Along with the hard money commercial loan, there are hard money business loans that are sometimes used to start up a new business or to allow an existing business to restructure and hopefully increase its bottom line. Hard money land loans can provide quick and easy funds to secure property.

As with all types of hard money loans, these examples also carry rates of interest that are higher than commercial bank loans and may not be regulated in the same manner as loans issued by a bank. However, they do offer the benefit of less red tape and are often the ideal solution when there is a need to move fast in order to take advantage of an opportunity.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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