# Hard Money Loan: Definition, Uses, and Pros & Cons

![Hard Money Loan: A type of loan that is secured by real property.](https://www.investopedia.com/thmb/PscVd6Srp-43QKXlWqJwSOPkpsM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/terms_h_hard_money_loan-FINAL-b9af7690939e45d5a80e25ee55c83d40.jpg)

*— Investopedia / Daniel Fishel*

## What Is a Hard Money Loan?

A hard money loan offers quick, short-term financing secured by real property, typically used as a last resort by real estate investors, developers, and property flippers. Unlike traditional bank loans, these loans are based primarily on the value of the collateral property rather than the borrower's creditworthiness, allowing for a faster approval process. However, they often come with higher interest rates, reflecting the increased risk taken on by private individuals or companies who usually serve as lenders in these transactions.

### Key Takeaways

*   Hard money loans are secured by real property and serve as short-term bridge or last-resort lending options, typically used in real estate transactions when speed is crucial.
*   These loans are known for their high interest rates, ranging from 10% to 18%, which reflects their higher risk compared to traditional mortgages.
*   Lenders focus on the value of the collateral, not the borrower's creditworthiness, allowing for a quicker approval process that can close within 10 business days.
*   Despite their rapid approval, hard money loans have shorter terms, usually between six to 18 months, and borrowers often use them to finance property renovations and flips.
*   The primary downside includes high cost due to interest rates and low loan-to-value ratios, which make them less suitable for owner-occupied properties.

## Understanding the Mechanics of Hard Money Loans

[Hard money](https://www.investopedia.com/terms/h/hardmoney.asp) loans have terms based mainly on the value of the property being used as collateral, not on the creditworthiness of the borrower. Since traditional lenders, such as banks, do not make hard money loans, hard money lenders are often private individuals or companies that see value in this type of potentially risky venture.

## Interest Rates on Hard Money Loans

Hard money loans usually have higher interest rates than traditional mortgages. In May 2024, these rates ranged from 10% to 18%, compared to regular mortgages, which had interest rates between 6.95% and 10.5%.

For flippers and short-term investors, the high interest rate might not matter since they plan to repay the loan quickly, reducing the cost. But for others, a loan with a lower rate is better.

The primary advantage of a hard money loan is speed; if you can wait a few months for your loan to come through, it might be better to look at [refinancing your home](https://www.investopedia.com/mortgage/refinance/) or taking out a personal loan.

## Common Applications for Hard Money Loans

Hard money loans are typically used by real estate investors, developers, and [flippers](https://www.investopedia.com/terms/f/flipper.asp). Hard money loans can be arranged much more quickly than a loan through a traditional bank.

In some cases, hard money lenders can issue funds in as little as 10 business days, while traditional banks have a wait time of 30 to 50 days for funding. Most hard money lenders offer loans for 65% to 75% of the property's value, with terms typically lasting six to 18 months.

Hard money loans may be sought by [property flippers](https://www.investopedia.com/terms/f/flipping.asp) who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly.

Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with [poor credit](https://www.investopedia.com/terms/b/bad-credit.asp) but substantial equity in their property. Since it can be issued quickly, a hard money loan can be used as a way to stave off [foreclosure](https://www.investopedia.com/terms/f/foreclosure.asp).

## Key Features to Anticipate from Hard Money Lenders

Hard money lenders do not operate the same as traditional money lenders. Here are a few key things to consider:

**Interest Rates:** Hard money lenders generally charge higher interest rates due to skipping traditional checks, which increases their risk. The higher the risk, the higher the interest rate.

**Loan Term:** Hard money loans come with shorter terms. The shorter term benefits both the hard money lender and the borrower. The hard money lender has a shorter period for which they are lending money, which reduces their risk period, and borrowers don't have to pay a high interest rate for a long period of time.

**Approval Metrics:** Most traditional lenders approve a loan or the amount of a loan based on standard industry metrics, such as accepted debt-to-income ratios. Hard money lenders set their own standards on what is acceptable.

**Oversight and Regulation:** Hard money lenders are similar to payday lenders in that they don't have much oversight or regulation to abide by.

## Selecting a Reliable Hard Money Lender

When choosing a hard money lender, there are certain areas you'll want to pay attention to. Take a look at the interest rate and shop around for the lowest one you can find. Also, look for lenders that provide you with a few loan options. You'll also want to get an idea of the time to close from the lender. The shorter the better. Accessibility and customer service should also play a role in your decision.

> **Important**
>
> Hard money lending can be viewed as an investment. There are many who have used this as a business model and actively practice it.

## Important Factors to Consider with Hard Money Loans

The cost of a [hard money loan](https://www.investopedia.com/articles/wealth-management/040216/using-hard-money-loans-real-estate-investments.asp) to the borrower is typically higher than financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule.

## Pros and Cons of Hard Money Loans

As with any financial product, there are advantages and disadvantages to hard money loans. These loans are quick and easy to arrange and have high [loan-to-value (LTV)](https://www.investopedia.com/terms/l/loantovalue.asp) ratios, but also high interest rates.

### Advantages

One advantage of a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other [traditional loan](https://www.investopedia.com/articles/investing/012617/how-get-loan-flip-house.asp) through a bank. The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant's financial position.

Lenders spend less time combing through a loan application, verifying income and reviewing financial documents, for example. If the borrower has an existing relationship with the lender, the process will be even smoother.

Hard loan investors aren't as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.

### Disadvantages

Since the property itself is used as the only protection against default, hard money loans usually have lower LTV ratios than traditional loans: around 50% to 75%, vs. 80% for regular mortgages (though it can go higher if the borrower is an experienced flipper).

Also, the interest rates tend to be high. For hard money loans, the rates can be even higher than those of [subprime](https://www.investopedia.com/terms/s/subprime.asp) loans.

Hard money lenders may avoid funding owner-occupied homes due to regulatory rules.

## What Are the Typical Terms of a Hard Money Loan?

Hard money loans are short-term, lasting three to 36 months, offering 65% to 75% of the property's value at rates between 10% and 18%.

## Is a Hard Money Loan a Good Investment?

It depends on what you use the money for. Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tape that goes along with bank financing. They can be useful to pay for a one-time expense or project, but only if you are reasonably sure you'll have the money to pay back the loan.

## What Are The Risks of a Hard Money Loan?

Hard money lenders typically charge a higher interest rate because they're assuming more risk than a traditional lender would. They may require a higher down payment than a traditional loan would, and you'll have a shorter period to pay back the loan.

## The Bottom Line

Hard money loans are typically used by real estate investors, developers, and flippers. They can be arranged much more quickly than a loan through a traditional bank, and loan terms are generally short: six to 18 months.

Hard money loans may be sought by investors who plan to renovate and resell the real estate that is used as collateral for the financing. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly.

> **Article Sources**
>
> 1.  Mortgage Calculator. "[Hard Money Loan Calculator](https://www.mortgagecalculator.org/calcs/hard-money-loans.php)."
>     
> 2.  Experian. "[The Pros and Cons of Hard Money Loans](https://www.experian.com/blogs/ask-experian/pros-and-cons-hard-money-loans/)."