Are Hard Money Loans Bad?

Hard money loans are a great tool for real estate investors, but the truth about this business is often misconstrued. There are a lot of people out there who hear the terms “hard money loan” or “private lending” and immediately give it a negative connotation. The way they see it, you’re spending a lot of money for a loan that is high risk and provides little reward once it is complete. But this couldn’t be further from the truth. Just like most other things in life, it is important to learn all the facts before you come to any conclusions.

Working with a private lender can help you increase your net worth exponentially. It is a myth that hard money loans are used only as a last resort. For experienced investors who know the process, we are the first call they make. Today we are going to debunk some of the most common myths about hard money loans. Read on to see if everything you know to be true about private lending is fact and not fiction.

Myth 1: Private Lending is Predatory Lending

Many people hear the term “hard money lending” and immediately think of it as predatory lending, otherwise known as loan sharks. In reality, most hard money lenders do not operate under this loan to own strategy which is so often what is depicted in Hollywood. Predatory lenders are those who know the borrower does not have the funds or the experience to successfully complete the deal, but they agree to fund them anyway. Then, with the poor advice from the lender, the borrower is forced to foreclose, leaving him empty-handed and the lender with a property that they pay pennies on the dollar for. The truth is, foreclosure is a very long and tedious process, and no lender really wants to deal with it. Good lenders will only accept loans that will perform well. At WCP, we want our borrowers to be successful every time they work with us. We take the time to provide you with all the knowledge, resources, and funds you need to successfully complete your deal time and time again.

Myth 2: Interest Rates are Exorbitantly High

While interest rates are usually higher on private loans than they are on commercial loans, they are not as high as many people think. The increased rate compensates for the higher risk that the lender is taking on by funding your project. But when you factor in the value of quick turnarounds for underwriting and construction draws, you will find that the higher interest rates are worth it every time. Commercial lenders, and sometimes even larger local lenders, cannot close as fast, which could end up costing you the entire deal.

Myth 3: Using a Hard Money Lender is a Last Resort

Many people believe that using a hard money lender is something you do only if you are desperate to get a loan after other institutions have turned you down. This could not be farther from the truth. You will find that experienced real estate investors go to private lenders first. Private lenders can offer you a turnaround time of a matter of hours instead of a matter of weeks. You have less obstacles in your way because you don’t have the same underwriting standards that you do with traditional loans. We are asset-based, meaning we are not underwriting the borrower as an individual but rather the deal itself.

Myth 4: Hard Money Loans are Difficult to Get

When you work with a private lender like WCP, you will find that our capital structure removes the barriers that can stop you from obtaining a loan quickly. We use on-call capital which streamlines the process of obtaining a loan because we are the only party that has to underwrite and approve the loan. Some other lenders may have lending lines of credit with local institutional banks, meaning there are then two parties that must underwrite the deal and approve. So while the myth may be true for other lenders, it’s not true for WCP.