Many people are amazed when they find out how huge the market for commercial loans is around the country. In 2020, the commercial banks in the United States alone owned loans worth about $14.9 trillion! On top of that, many experts expect that the commercial banking industry will continue to grow at a rate of about 6.5% per year until 2028 or later.
One of the reasons this market is so huge is that commercial banks have created a wide variety of options for people and businesses that need to borrow money. Hard money commercial loans are an option that more people are beginning to appreciate for their unique benefits.
On the other hand, there are some significant downsides to consider before you pull the trigger on getting a hard money commercial loan. Understanding more about the pros and cons of this kind of loan can help you decide if getting one is the right choice for your financial needs.
Read on to learn all about the most vital things to understand about hard money commercial loans and why they might or might not be the best option for you!
What Is a Hard Money Loan?
With so many different types of loans out there, it can be hard to keep straight all of the differences between them. So what is a hard money loan in particular?
Hard money loans are used to purchase a property. The interesting thing about hard money loans is that they use the purchased property as collateral from the loan. That means that if someone is unable to pay their hard money commercial loan back, the bank or lender can take ownership of the property.
Hard money commercial loans are often available from private lenders and investors. Banks are much less likely to provide this kind of loan because borrowers seeking hard money commercial loans often have lower credit scores.
Who Should Consider Hard Money Loan Options?
So who are hard money commercial loans a good option for?
In many cases, house flippers depend on hard money commercial loans to help them make money in the long run. They start out by taking out a hard money loan to help them purchase a home.
Then, they fix up the home and sell it at a significant profit. That allows them to then pay off their loan while keeping whatever is left over.
In other cases, rental property investors depend on hard money commercial loans to make quick deals. If a rental property investor finds a gold mine of a property, they might want to get cash on hand as soon as possible to buy it.
Even if a rental property investor has access to cash, traditional ways of accessing it might take longer. Hard money commercial loans are often available faster than traditional alternatives.
In other cases, business owners will use hard money commercial loans to help them buy a property. They can then run their business out of that property and use their business income to pay off the loan.
Some people even use hard money commercial loans to buy a property they intend to live in. These residential owner-occupied loans are becoming more common all the time.
Benefits of Hard Money Commercial Loans
We have already mentioned a few of the reasons that hard money commercial loans are sometimes better than alternatives. For one thing, you can often acquire funds much faster by getting a hard money commercial loan. In fact, it might take only a few days to finish arranging a hard money loan.
On top of that, hard money commercial loans are sometimes available to people who have no other potential sources of funds. Because hard money commercial loans use the property as collateral, they do not need to depend as much on the borrower’s finances. If your finances are such that you would find it difficult to get a traditional loan, you might not have any other option than a hard money commercial loan.
The same basic principle applies to things like your credit score. If your credit score is low enough that you can’t get most loans, you might still be able to qualify for a hard money commercial loan.
Issues You Might Encounter Getting a Loan
Considering these advantages, you might wonder why more people and businesses don’t rely on hard money commercial loans. Although these loans have their benefits, they often tend to come with higher interest rates at the same time. In the long run, that means you will end up paying more money to pay off hard money loans.
On top of that, a hard money commercial loan provider might ask for a larger down payment than a traditional loan would require. If you don’t have that money on hand, you might not be able to get the loan you would like.
Another downside of hard money commercial loans is that you may not have much time to pay them off. Many hard money commercial loans require that you finish paying them off within 3 years or less.
Know the Details of Hard Money Commercial Loans
Many people do not know if hard money commercial loans are the right choice for their situation because they do not know much about them. We hope that the information in this article will help you decide how to proceed with your own financial situation. Although hard money commercial loans are not always the best option, they are always worth considering.
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