The hard money loan is a private loan in which actual cash is transferred from the lender to the borrower for the purpose of making a large purchase, usually a real estate purpose. The hard money loan is unusual because of the large transfer of hard money rather than the exchange of money through seller or lender carrying on the home. The hard money loan is a risky loan for lenders and often comes with a high interest rate. However, because the hard money loan is a private loan, the terms and agreements of the hard money loan are generally negotiable.

Understanding the hard money loan

The hard money loan is often expressed in complex real estate terminology which makes it difficult to understand but the hard money loan is actually a very simple concept. It is the provision of an actual cash loan made to a borrower by a private lender. The hard money loan is not subject to the stringent guidelines of a federal or conglomerate lending institution and is therefore negotiable with the lender.

People who apply for the hard money loan

The hard money loan is a private loan which does not require the same stringent guidelines as other loan types. For this reason, the hard money loan is often sought by people who:

Have a history of bad credit
Have no credit
Have previously had a home foreclosure
Have unverifiable income
Must refinance immediately
Need hard money

In other words

Another way of thinking about the hard money loan is to consider it the pawn shop equivalent for real estate. The hard money loan is available with few questions asked and is given in cash. The cash can be used, as intended, for the financing of the home or it can be used by the borrower in some other fashion. Either way, the hard money loan will still need to be repaid and the home is at stake. This makes the hard money loan a risky loan.

Pros and cons to a risky loan

The hard money loan is risky to the lender because of the commonly poor credit history of the hard money loan borrower. This means that the hard money loan lender is in a prime position to charge a high interest rate and excessive repayment failure penalty fees. This puts the hard money loan borrower in a negative position. The benefit is that, as a private loan, it is easier to qualify for the risky loan and the terms are somewhat negotiable in comparison to other loan types.

The hard money loan is risky for the borrower because of the accessibility to large amounts of cash. The hard money loan provides cash to the borrower which the borrower must be responsible for in terms of using it appropriately. Failure to make repayment on the hard money loan can result in excessive debt, bad credit and even home foreclosure. The responsible hard money loan borrower will be able to avoid these pitfalls but the irresponsible or immature borrower should think twice before applying for and accepting the hard money loan.