A hard money loan can mean the difference between you funding your real estate investment dreams and you having to miss out on them. A hard money loan is a short-term real estate loan that people use to fund real estate purchases. They’re favored by real estate investors looking for money that will help them compete in the real estate market.

If you’re planning on getting a hard money loan, you should know the pros and cons so that you can make the best decisions for your circumstances.

Pros of Hard Money Loans

There are many reasons that getting a hard money loan would make sense to borrowers.

Money is Delivered Quickly
The turnaround time between the time you get approved and the time you get cash in hand is extremely quick. Most borrowers will have their cash in under a week, and some will get theirs even sooner. This quick turnaround time makes it possible for investors to respond quickly to fast-moving real estate transactions like bidding wars and hot properties that have poppped oup on the market. Traditional loans take anywhere from 30 to 45 days to be approved, and most traditional lenders make it really difficult to get loans to purchase real estate investment properties.

Your Credit Rating is Secondary
A hard money lender will look at your credit rating to get an idea of how you make payments, but the primary factor that will be considered when making a loan determination will be the value of the collateral you bring to the table. Hard money lenders lend money to people who have the collateral to back up the loan. That collateral could be a property you already own or the property you’re planning on purchasing. In the case of hard money loans, it’s usually the latter.

The Terms of the Loan May Be Flexible
Hard money loans are made by individuals and investors instead of banks. This means that a lot of the set-in-stone terms that you’d encounter with a traditional bank are for the most part absent here. Hard money lenders definitely have their rules, but they may be able to be more flexible with the terms of the loan. Speak with the lender that you’re interested in, and see what they have to offer.

Cons of Hard Money Loans

The following issues are things you need to think about before you move forward with a hard money loan.

The Interests Rates Are High
The interest rates for hard money loans are higher than the ones that you’d get with a traditional lender. The reason that they’re higher is because short-term real estate investment loans are riskier, and the hard money lender is taking on that risk. Pay attention to the interest rates, especially if you’re not making any payments until the loan comes due at the end of the loan term. Interest can tack on many thousands of dollars to a loan.

There’s One Giant Balloon Payment at the End of the Loan Term
Hard money lenders are paid back at the end of the loan term, a period which can last anywhere from six months to three years. The thinking is that your investment property will sell, and the lender will be paid. This is great if the property sells. If the property doesn’t sell, you’ll have to refinance the loan, a contingency plan that you’ll have to account for ahead of time. If you don’t have a back-up plan in place when the loan comes due, the lender could foreclose on your property. Make absolute sure you have a plan in place for a worst case scenario.

The Industry Has Little Federal Oversight
The days when the industry was overrun with predator hard money lenders has passed, with most people having a good experience with lenders today. In spite of this progress, it’s still possible to be taken in by an unscrupulous lender if you don’t do your homework.