Hard money lenders have a reputation for charging much higher interest rates compared to banks. Where a bank might charge 5%, a hard money lender will not do anything less than 9%. It might even go as high as 12%. Before you choke on those numbers, there are valid reasons borrowers do not mind paying higher interest rates on hard money.
Don’t be fooled by the notion that hard money is only for losers unable to obtain traditional financing. Nothing could be further from the truth. Some of the biggest companies in the world rely on hard money to get deals done. They could just as easily go to banks, but they find hard money works for their short-term financing goals.
To drive home the point, here are three reasons hard money’s higher interest is worth paying:
1. Much Faster Funding
Some regular hard money users count higher interest rates as a cost of doing business. So, what do you get for that extra cost? For starters, Salt Lake City’s Actium Partners says you get much faster funding. The typical hard money lender can fund loans in a matter of days. Banks take weeks, or even months.
Imagine a real estate investor trying to close a deal on a hot property. He is facing stiff competition. His success essentially boils down to the speed at which he can arrange your financing. Six weeks wait on a bank won’t do. He contacts a hard money lender who funds his project in 72 hours.
2. Greater Lending Flexibility
Paying higher interest rates also gets you greater lending flexibility. Again, imagine a real estate investor looking to buy a multi-family housing unit in town. The bank is happy to finance that purchase. But let’s say he also want to acquire several neighboring single-family homes that he intends to flip. The bank will not touch them.
Fix-and-flip loans are generally something banks are not interested in funding. Now he is forced to find a separate lender for that portion of the deal. On the other hand, hard money lenders have the flexibility to accommodate both objectives. Here’s the thing: hard money lenders are private lenders with the ability to find ways to make deals happen. They can adapt to unusual situations, higher LTV’s, etc.
3. Fewer Lending Requirements
Finally, higher interest rates will get you fewer lending requirements. This is not to say that hard money lenders lend to people with a questionable ability to repay. That’s certainly not the case. Rather, their lending requirements are not as stringent because they rely almost entirely on collateral to protect their interests.
As long as that real estate investor has strong enough collateral to properly secure a loan, that’s all he needs. Paperwork requirements are minimal; income verification is not necessary; credit checks only serve to determine interest rates and terms, not approval.
Final Word About Interest
In closing, it is important to remember one aspect of interest that rarely gets talked about: its relationship to loan terms. In any lending situation, the length of a loan is actually more important than the interest rate. Simple math demonstrates as much.
Take out a 12-month, $50,000 loan at 10% and your total repayment amount is $55,000. That same loan at 5% for five years as a total repayment cost of over $56,000. Paying either loan according to its set terms equates to a savings of more than $1,000 on the hard money loan.
Now you know why some businesses prefer hard money loans over traditional financing. Sometimes it is worth paying higher interest rates to get what hard money lending offers.