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What is Hard Money Lending?

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Hard-money lending operates by very different rules than traditional bank-based lending. The major difference is that most hard-money loans are not made by banks or traditional lenders. Instead they are made by companies or individuals that want a quick return on the investment.

 

This kind of lending is called hard-money because the borrower has to put up collateral or sign some sort of agreement that gives the lender access to future income. In other words they have to promise hard money in order to get the loan. A classic example of it is a payday loan in which the borrower uses his or her next paycheck or salary payment as collateral for a loan.

 

Interested in Cash

There are a wide variety of hard money lenders out there including pawnbrokers, payday lenders and many companies that specialize on such loans to businesses. There are some lenders that make hard-money loans to real estate investors in such an arrangement the borrower has to put up the property or a lien on the property as collateral.

 

Another example of such lending is a factor that lends money to businesses. A factor often uses a company’s inventory as collateral. An accounts-receivable lender uses a business’s outstanding or unpaid invoices as collateral. Other lenders may loan to business if the business owner signs an agreement to let them take part of the business’s cash flow for loan repayment.

 

The main characteristic of such lenders is that they are interested in cash. If a person or business has cash or the ability to generate it they will loan him or it money. This flexibility in lending often comes at a high price though.

 

High Interest Rates and Strict Repayment Terms

Hard-money lenders are popular because they will lend funds without a credit report. They often loan funds to individuals and business that cannot borrow anywhere else such as persons with bad credit. Others may loan to immigrants, start up businesses and others that cannot get traditional loans.

 

They are willing to make such risky loans because they charge a much higher interest rate than the banks would. A hard-money lender might charge a business 15% or 20% interest on a loan. He will also impose strict repayment terms so the borrower will have to pay the funds back quickly. He or she may have to sign an agreement letting the lender take funds from his or her bank account for repayment.

 

Obviously such lending is not a good deal for the average person. A person or business that can get a bank loan or line of credit should use it instead. It will cost less and the terms will generally be better.

 

One reason that some entrepreneurs use hard-money lines of credit is that they can get the money quickly. A hard cash lender will often make a decision in few minutes and release the funds immediately. Unlike a bankComputer Technology Articles, he might ask for very little paperwork and be willing to overlook the borrower’s past. Such lenders could also advance funds for questionable business deals or to businesses without a proven track record.

 

Even though it is very easy to take advantage of hard money lending is not a very good deal. The cost is simply too high and the terms are too strict.

Source: Free Articles from ArticlesFactory.com

ABOUT THE AUTHOR


Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuities Explained, Fixed Income Annuity, and Annuity Leads.




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