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What Are The Risks Of Hard Money Lending?

Are you considering a hard money loan for your next investment? If so, it's important to understand the risks involved in this type of lending. Here we will take a look at some of the key risks and how they can impact your bottom line. So, what are the risks of hard money lending? Let's find out!

What Are The Risks Of Hard Money Lending?

High-Interest Rates

As the risks of hard money lending are generally higher than with traditional loans, so too are the interest rates. This is because hard money lenders are essentially taking on a greater risk by loaning money to borrowers with poor credit or collateral. In order to offset this risk, hard money lenders typically charge higher interest rates than banks or other traditional lenders.


This can make repaying a hard money loan much more expensive than a traditional loan, which is one of the risks to consider before taking out this type of loan. If you're not able to repay the loan in full and on time, you may find yourself facing steep penalties and fees that can further add to the cost of the loan.


While the higher interest rates may be worth it for some borrowers who need fast cash, others may find that the costs are too high. Be sure to consider all of the risks before taking out a hard money loan.


It Requires A Higher Down Payment

The risks of hard money lending are higher than traditional lending for a couple of reasons. First, hard money lenders are usually more interested in the value of the property than the borrower’s ability to repay the loan. This means that they are often willing to lend money to borrowers with poor credit histories or who might not be able to qualify for a traditional loan.


Second, hard money loans are typically short-term loans, which means that they must be repaid within a relatively short period of time. This can put borrowers at risk of defaulting on their loan if they are unable to sell the property or refinance the loan.


Lastly, hard money loans typically have higher interest rates than traditional loans, which means that borrowers will have to pay more in interest over the life of the loan.


Despite these risks, hard money lending can be a good option for borrowers who are unable to qualify for traditional loans or who need to borrow money quickly. If you are considering a hard money loan, be sure to shop around and compare offers from multiple lenders to ensure that you are getting the best deal possible.


It Does Not Provide Long-Term Loans

There are several reasons for this. First, hard money lending services tend to deal with properties that are in some stage of distress. This could be a property that is in foreclosure or a short sale. In either case, the risks are high and the time frame is relatively short.


Second, hard money lenders typically charge higher interest rates than traditional lenders. This is because they are taking on more risk by lending to borrowers with less-than-perfect credit.


Third, hard money loans are typically used as a bridge loan - a loan that helps the borrower get from one point to another (from the purchase of a distressed property to the sale of that same property). Once the property is sold, the borrower can then pay off the loan in full.


So, while there are risks associated with hard money lending, it is still possible to find reputable and reliable lenders who can help you meet your short-term financing needs. Just be sure to do your research and shop around before selecting a lender.


Changes In The Real Estate Market

When it comes to hard money lending, risks can come from a number of sources. Most notably, risks can come from changes in the real estate market. When the value of the property decreases, it becomes more difficult for borrowers to repay loans and investors to recoup their investments. As a result, hard money lenders may be less willing to lend money during periods of market decline.


Potential For Fraud And Default

Other risks associated with hard money lending include the potential for fraud and the possibility of default by borrowers. While hard money lenders typically perform due diligence on loan applicants, there is always the chance that some applicants may misrepresent themselves or their properties in order to obtain financing. Additionally, even if a borrower has good intentions, financial difficulties can still lead to loan defaults.


So, what are the risks of hard money lending? Well, as we’ve seen, there are quite a few. But don’t let that scare you away from this valuable form of financing. At the end of the day, when used correctly, hard money loans can be an incredibly useful tool for businesses and property owners alike. If you’re interested in learning more about how a hard money loan could benefit your business or property portfolio, give us a call today. We would be happy to answer any questions you have and help get you started on the path to securing the funding you need to succeed.

Do You Need a Hard Money Lender You Can Trust?

Persevere Lending (PL) is a California Corporation, specializing in the brokerage of privately funded mortgage transactions for real estate in Northern California, primarily in the greater Bay Area.  As you may know, Trust Deed investing, also known as “private” or “hard” money, is a niche alternative investment vehicle that offers an attractive return with the security of a Deed of Trust lien on the real estate collateral. We encourage you to call us at your earliest convenience to discuss private Trust Deed investing in more detail.  We can explain how you can enjoy tax-deferred interest income. We can also show you how even if a deal goes bad, you most likely will not lose a penny of your capital and you may actually make much more in the end. While nobody has a crystal ball, and we certainly will not pretend to know what will happen in the future, we do believe that there are trends in the market, both historical and current, that suggest that investing in real estate remains a secure and profitable investment option. Contact us today for your consultation!