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It depends what you use the money for. Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tape that goes along with bank financing. They can be useful to pay for a one-time expense or project, but only if you are reasonably sure you'll have the money to pay back the loan.

Hard money lenders typically charge a higher interest rate because they're assuming more risk than a traditional lender would. They may require a higher down payment than a traditional loan would, and you'll have a shorter period to pay back the loan.

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A hard money loan is a short-term loan that often requires the borrower to use an asset, like a home, as collateral to secure the loan. Hard money loans are also referred to as bridge loans and can be used to help finance one house while preparing to sell another.

The lender may superficially check your credit or finances, but, in general, the process will be much less rigorous than with a traditional loan. The less stringent credit check allows borrowers to get their money in days instead of weeks or months.

The most common examples are developers and house flippers who need cash flow to help fund their next real estate investment. Real estate investors use these loans for funding since the funding time frame is often much shorter than mortgage loans.

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University where she studied PR Writing, Film Production, and Film Editing. Her creative talents shine through her contributions to the popular video series "Home Lore" and "The Red Desk," which were nominated for the prestigious Shorty Awards. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.

Individuals, investment companies and other private, nonbanking businesses provide hard money loans. Real estate is most commonly used as collateral for a hard money loan, but other hard assets such as vehicles, equipment, machinery and precious metals could also secure the loan.

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The Lakers, one of the NBA's most profitable franchises, applied for relief through the Small Business Administration's Paycheck Protection Program, and were among the companies and nonprofits granted loans during the first round of distributions. But after reports that several large or highly capitalized entities were securing aid from the program's initial $349 billion pool -- while hundreds of thousands of smaller businesses were shut out -- the Lakers said they returned the money.

"The Lakers qualified for and received a loan under the Payroll Protection Program," the Lakers said in a statement to ESPN. "Once we found out the funds from the program had been depleted, we repaid the loan so that financial support would be directed to those most in need. The Lakers remain completely committed to supporting both our employees and our community."

The program, which was established as part of the $2.2 trillion CARES Act and launched on April 3, enables small businesses to apply for and receive loans to cover employee salaries and other expenses. As a business with about 300 employees, the Lakers were eligible for a PPP loan, which is forgivable so long as the recipient spends 75% of the amount on payroll and doesn't fire anyone.

The PPP ran out of money after less than two weeks, leaving many mom and pop businesses without the assistance they sought. Some of those loans went to high-profile companies with strong relationships with commercial or private banks, who were able to simplify the application process for their clients.

Shake Shack, the specialty burger chain with a market capitalization of $2 billion, received a $10 million loan. AutoNation, a Fortune 500 auto retailer, received $77 million from the PPP. Both companies have since announced they would return the funds.

A hard money loan is a specific type of asset-based loan: a financing instrument through which a borrower receives funds secured by real property. Hard money loans are typically issued by private investors or companies. Interest rates are typically higher than conventional commercial or residential property loans because of the higher risk and shorter duration of the loan.[1]

Most hard money loans are used for projects lasting from a few months to a few years. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as costs to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an asset-based loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring.[2]

The loan amount the hard money lender is able to lend is determined by the ratio of loan amount divided by the value of the property. This is known as the loan to value (LTV). Many hard money lenders will only lend up to 65% of the current value of the property.[3] There is no such thing as 100% LTV for this type of transactions. These loans are meant for investors and the lenders will always require a higher down payment.

"Hard money" is a term that is used almost exclusively in the United States and Canada, where these types of loans are most common. In commercial real estate, hard money developed as an alternative "last resort" for property owners seeking capital against the equity in their real estate holdings. The industry began in the late 1950s when the credit industry in the U.S. underwent drastic changes.[4]

Because the primary basis for making a hard money loan is the liquidation value of the collateral backing the note, hard money lenders will always want to determine the LTV (loan to value) prior to making any extension of financing. A hard money lender determines the value of the property through a BPO (broker price opinion) or an independent appraisal done by a licensed appraiser in the state in which the property is located.[8]

The interest rates on hard money loans are typically higher than the rates charged for traditional business loans. Rates could be as low as 6% and as high as 14% or more. Despite this, such loan options are popular among real estate investors for their fast approvals, higher flexibility, less extensive documentation procedures, and because they are sometimes the only option for securing funds.[9]

But as a real estate investing coach who often helps clients navigate the hard money transaction process, I know it's important to first understand the ins and outs of these loans before making a final decision.

As I mentioned above, hard money loans are often used by real estate investors, house flippers and real estate developers. These types of loans can be a quicker and easier way to secure an investment purchase without the need for traditional financing or the approval process that is required by typical financial institutions. Since these types of loans are asset-based, they are not contingent on the borrower's creditworthiness.

The purpose of using these types of loans is to secure a property to renovate or develop and ultimately sell it for a profit. An investor might choose a hard money loan over a conventional loan because of the ease of access to the funds. Lending options from financial institutions often have complicated approval processes and weigh heavily on the borrower for approval. Hard money loans are asset-based and typically secured by a mortgage, so their approval process is much faster. In my experience, lenders will review the subject property and can make a lending decision within days.

If you're looking to buy a house to flip or as a rental property, it can be challenging to get a traditional mortgage. If your credit score isn't where a traditional lender would like it or you need cash more quickly than a lender is able to provide it, you could be out of luck. In situations like these, some borrowers might turn to what are known as hard money loans.

Hard money loans are short-term secured loans that use the property you're purchasing as collateral. You won't find one from your bank: Hard money loans are offered by alternative lenders such as individual investors and private companies, who typically overlook mediocre credit scores and other financial factors and instead base their decision on the property to be collateralized. While you might jump through fewer hoops to get a hard money loan, this type of lending comes with risks and isn't the best option for many people.

For these reasons, a hard money loan can be a compelling alternative for people who are unable to qualify for a traditional loan, but these loans can be very risky. It's key to consider all the perils they expose.

Just as with any loan, review the pros and cons of a hard money loan before you commit to borrowing. You might find that a hard money loan is the best option for borrowing, or you might decide to pursue an alternative. Regardless of what type of loan you choose, it's probably a good idea to check your free credit score and free credit report with Experian to see where your finances stand. 2351a5e196