So you have searched hard to find the right investment property. The only problem is that the property is less than pristine and no conventional money lenders are willing to finance your investment. Enter the private money loan. While private money lending may be the perfect option or you, the following are a few risks to be aware of when getting a private money loan.
High-Interest Rate
One of the biggest downsides of a hard money loan is that they come with very high interest rates. In fact, it is quite reasonable to see these loans being accompanied by interest rates between 10-20 percent.
However, the reason for this is because the lenders are also taking a risk by loaning so much money, which means they want to make sure the borrower has an incentive to pay it back as soon as possible.
High origination fee
This is the fee the lender charges to process the loan.
The reason for the origination fee being high is again due to the risk the lender is putting into the borrower’s investment. It is quite common for the lender to charge as much as five times the amount of a regular lender.
Short-Term
In a typical mortgage, it is common to see that the payoff can go up to 15 to 30 years. However, for hard money loans, they would have to be paid back within a few months or years.
Losing the Property
The borrower can lose the property if they are unable to pay off the loan.
Hard money loans, like any other loan, do come with risks. However, the benefits outweigh the downfalls. In fact, private money lending is one of the most convenient ways to obtain a loan and does not focus intently into a credit score appearance. With numerous other benefits, hard money loans are guaranteed as one of the best ways to fund real estate investments.
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