How Is a Hard Money Loan Different From a Traditional Loan?

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A hard money loan is a form of short-term credit from non-traditional lenders who are private companies or individuals. The collateral accepted in the case of a hard money loan is an asset or property. You can check out if you want to apply for a loan. Investors usually choose a hard money loan over a traditional one to avoid the red tape of financial institutions. Moreover, individuals approach a hard money lender for a quick fix after a bank has rejected their mortgage application.

One of the similarities between a hard money loan and a traditional loan is that both are secure. However, in the former, the security is the property for purchase that the lender will take over in case of non-payment of dues. In addition, hard money loans have a short approval timing, unlike a traditional financial institution where the approval process is quite stringent. Therefore, if you are looking for quicker approval, then hard money lenders are better options.

Hard money lenders have a separate set of rules that generally have minimal similarity with the rules and regulations of banks. They have the option of stating rules as per their choice, which can differ from one borrower to another. In the case of hard money loans, your creditworthiness is not a primary factor that will impact the approval of your money.

What is the process of approval for both types of loans?

While “traditional” is only a contextual category that helps state the difference, these are the usual sources from where people take loans. In this case, after you apply for a loan, the officials will ask for your credit history along with a few other documents, after which the investigation process will begin.

If the team concludes that you can repay the loan amount and everything else is alright, your loan will be approved. The different types of loans that fall under traditional loans include equity loans, personal loans, auto loans, and mortgage loans.

While all of these loans can also be availed from private lenders, the risk is higher in that case. A traditional money lending organization will approve a loan only after learning about your past and present financial situation. Therefore, the process is usually lengthy, and the risk is less.

In hard money loans, the lender will first learn about the nature and value of property an investor wants to purchase and refurbish. It is only then that the loan amount is sanctioned. While modern hard money lenders also check your financial situation, the investigation is on a very general level that is not rigorous.

As a result, the procedure is quite fast, and it usually takes just a couple of days before your loan is approved. However, one disadvantage of a hard money lender is that the amount of risk he takes is generally higher by not considering the borrower’s creditworthiness.

On the contrary, the borrower has to compensate the risk by paying slightly higher interest rates, and ultimately it becomes a more expensive loan. The repayment window is also shorter in the case of hard money loans.

If you are an investor and worry because a potential property may slip away from your hands because of the lack of funds, approaching a hard money lender is the best option. However, if you are looking for a loan that will demand lower interest and a longer repayment window, then a traditional loan is a better option for you.

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