Anyone entering the real estate game understands the importance of having money to make residential purchases. Without funds being readily available, fix and flip plans come crashing to a halt. A loan may be necessary to keep one’s dream alive. While traditional loans depend on the borrower’s credit score, hard money loans leverage physical assets. Using a piece of real estate as the basis for a loan comes with unique pros and cons. Here are a few worth contemplating before taking the plunge.

Advantages

Speed is one of the biggest plusses of hard money loans, as they present fewer hoops to jump through. Depending on the circumstances, you could have your cash in several weeks, sometimes even a few days.

Traditional loans typically require borrowers to put down at least 5 percent of the home’s purchase price. Compare this with hard money loans, where borrowers only shoulder the monthly interest and origination fees. Without the burdens inherent in conventional loans, you’ll be able to borrow more.

Another benefit is that it will help you establish a positive relationship with a lender, provided you demonstrate an ability to pay the loan back on time. Holding up your end of the deal may result in even more favorable terms with future agreements on other property deals.

These loans are an excellent starting point for real estate investment novices. They allow you the opportunity to get your feet wet when other doors remain closed. Later on, your history may allow the possibility of securing a bank loan with a lower interest rate.

Disadvantages

Hard money lenders assume significant risk by providing such large amounts of money. Therefore, expect to pay higher interest rates than you would with a traditional loan. Anywhere between 10 and 20 percent is typical. These lenders want you to pay them back as fast as possible.

Origination fees remain another concern. This processing charge is calculated based on the total amount of the loan. The cost is sometimes as much as five times what you would pay a more conventional lender.

Loans of this type also feature aggressive repayment schedules. If you miss any deadlines, the interest rate could go higher. Another possibility is that you wind up losing the property entirely.

Hard money loans are often an excellent option for young real estate investors. Despite everything that makes them great, they have significant downsides. Think carefully about whether accepting one makes sense before signing on the dotted line.