- a person or group who usually gives small personal loans
- charges high rates of interest
- take high risk
- play a significant role in lending money to those people with less access to banking activities
- offers loans to people who are unbanked or under-banked
- also provides loans to those in situations where borrowers do not have a good credit history
- sometimes lends money to people like gamblers and compulsive shoppers who get into debt
Amidst so many lending services provided and various options available, the decision of borrowing money from money lenders becomes quite challenging. Extremely difficult and straining at times.
So, to make your task easier, faster, and more efficient, we have come up with this list of things that you should know before borrowing money from money lenders. This will not only make you well versed when it comes to money lenders, but it will also make you more aware.
Let’s get started!
1) Hard Money Lender
Who should go to Hard money lenders?
- Hard money loans are for those in serious need of funds or need cash urgently.
- When one needs to make, the purchase happen quickly.
- Hard money loans are the next best option for those who do not qualify for any other form of loan or financing.
- Buying an investment property
- Flipping houses
Many hard money lenders in the United States claim to be the fastest and provide loans with zero percent down payment. However, one has to be cautious in these situations. Everyone has to be cautious in these situations.
What is a Hard Money Loan?
As the name suggests, hard money loans indicate the distinctive and hard feature of the loan, that is, using a tangible asset to back the loan’s value. So, if the borrower defaults on the secured loan, the lender will take over ownership of those tangible assets, hence, recovering the losses.
The concept of Hard money will become more clear further.
How hard money loan is different from a traditional loan?
- Traditional mortgage and hard money loans are alike in terms of a secured loan. Both are secured loans, which implies that both are guaranteed by the property used to purchase.
- The approval process of hard money loans is generally less stringent and very fast than a traditional mortgage or other types of secured loans.
- Traditional lenders waste your time with long approvals.
Hard Money Lenders provide hard money loans to borrowers with alternative lending circumstances or those who need fast money. Nonbanks and private lenders employ alternative underwriting guidelines to fulfill this group’s aim. These are different when compared to those used for prime mortgages in the following terms:
- require less documentation than banks
- less likely to ask for credit score, Bankruptcy history and Foreclosure history.
This means that borrowers with a less solid credit history will have an easier time being approved for hard money loans. This is because their financial background is not a factor in qualifying them.
- Moneylenders depend on borrowers’ equity as collateral.
- hard money lenders claim the property if a borrower defaults
- they can even force a sale of the property to recover the funds lost on the loan
Benefits of Hard money mortgages for borrowers:
- immediate access to funds
- the approval process is quick
- involves less hassle
- easier approval
- faster funding, that is, getting you the money you need when you need it.
- faster turn around time
- Fewer qualification requirements
Drawbacks of Hard money mortgages for borrowers:
- shorter repayment terms
- higher interest rates
- a certain amount of risk
- more upfront costs (such as closing costs)
- higher origination fees
- requires a larger down payment (like more than 30%)
- borrower’s house secures the loan
Looking at all the positives and negatives of hard money loans, it is advised that if one’s financial background and minimum credit score qualify for other forms of financing, one should consider going for those better options. This wise decision will cost less money in the long term! A hard money loan might turn out to be a financial disaster.
However, one can go for it when there’s an urgent need for money.
All in all, hard money loans are comparatively more expensive due to the high risk that the lender takes by offering the loan.
What do Experts have to say?
- “Also, unlike a traditional mortgage, the value in a hard money loan deal is factored into the underwriting much more than the borrower’s credit score,” says Shipwash.
- “Hard money lenders, the term “hard money lender,” is used to describe the entity outside a traditional bank or credit union that leads to an individual or business. A hard money lender is similar to payday lenders offering personal loans or title pawn lenders, without much oversight or regulation to adhere to”, says Bruce Ailion, a real estate attorney and Realtor in Atlanta. “Lenders can charge what they want for the risk they take in making a loan,” Ailion says.
2) Each lender has its qualification criteria
Each lender has its qualification criteria concerning autopay and loyalty discounts.
- (For example, some lenders require the borrower to elect Autopay before loan funding to qualify for the autopay discount).
All rates are determined by the Mortgage Lenders and must be agreed upon between the borrower and the borrower’s lender that is chosen.
3) Sole discretion
All credit decisions, including loan approval, if any, are solely determined by Lenders. Lenders will conduct a hard credit pull when the borrower applies. Hard credit will have an impact on the credit score.
4) Lowest rate
Interest rate is a percentage of the principal of the amount loaned. It is the amount a lender charges a borrower. The lowest rate advertised is not available for all loan sizes, types, or purposes.
5) Steps of Loan approval
Hard Money Loan Rates: How is the approval process set for any loan breaks down to the following:
- the lender reviews all the background information
- the lender determines if you can reasonably commit to make the necessary payments.
- In the case of a hard money loan, the lender does not dig into your financial background
6) Personal Loans
A personal loan is a loan whose money is lent through a financial institution like a bank or an online lender, or marketplace.
- This can be used to pay down credit cards, consolidate debt or cover a wide range of other expenses.
Personal loans have fixed monthly payments for a set period.
How is a personal loan different than a credit card?
Credit cards come with credit limits, introductory rates, or revolving balances. But, personal loans involve a fixed rate and payment that the borrower chooses upfront. Also, no additional interest will be added to the borrower’s loan once the borrower locks in.
Fee on personal loans
Fees on a personal loan include a variety of things like application costs, underwriting, funding and other associated administrative services.
The fee amount can vary from a money lender to a money lender. Also, it should be noted that an origination fee is generally deducted from the loan proceeds before the borrower gets the required funds in the bank account. This is usually between 1% and 8% of the loan amount.
- For example, if one borrows $15,000 with a 5% origination fee, $750 would go to the fee, and one’d receive $14,250. If the lender one chooses charged an origination fee, be sure to consider it when choosing the loan amount — otherwise, one could end up with less money.
Plus point about personal loans:
The good news is that a personal loan can positively impact one’s credit by showing a history of on-time payments and reducing one’s total debt.
- (as long as one doesn’t add a new debt, like increased credit card balances)
How Much Can You Borrow?
How do money lenders determine how much people can borrow?
- the credit score
- possible collateral
- already-existing financial relationship with you.
7) Credit approval
Loans are subject to credit approval and sufficient investor commitment.
- Excellent credit
- Good credit
- Fair credit
- Bad credit
- No credit history Secured credit cards
A minimum credit score is needed to be on the safer side.
To qualify for an equity loan, the moneylender looks for the borrower with enough equity in their home: equity is the difference between what your home is worth and what you owe on your mortgage.
If you are in a situation where you don’t have a good credit rating, then getting loan approval, that too, a traditional loan, is next to impossible. However, when applying for a hard money loan, you are dealing with an individual or a group of lenders.
You will not be borrowing from the traditional bank anymore. Thus, there is no need to provide the money lender with a lot of information to approve the loan. They are not concerned with what credit score you have. They are just interested in taking high-interest rates, as long as you pay them on time.
8) Soft credit inquiry VS Hard credit inquiry
Checking one’s loan rate generates a soft credit inquiry on one’s credit report, visible only to that person. A hard credit inquiry, which is visible to the person and others and may affect one’s credit score, only appears on one’s credit report if and when a loan is issued to that person.
The loan APR will depend upon one’s credit score and other key financing characteristics, including but not limited to the amount financed, loan term length, and one’s credit usage and history.
Also, note that some companies may call themselves private lenders simply because they are privately owned. Like hard money lenders, you can also find them on the internet. Companies can close deals on various property types at competitive interest rates in the 48 states. Terms may vary from state to state.
9) Down Payment
The main point to keep in mind about a down payment is as follows:
- up-front payment
- initial partial payment
- payment is made for the purchase of expensive products &/or services such as car, bike or a house
- generally paid in cash or equivalent like a personal check, cashier’s check, credit card, or electronic payment
- the remaining payment for the purchase of that expensive product or service is made with the loan amount.
- reduces the amount of money you will have to borrow
- the more you pay for the down payment, the lesser amount of the loan and lower the interest rate
10) Personal finance
Personal finance is the management of your own or your family’s finance. It includes saving moving, family loans, accounts, expenses, donations, tax, asset and liability handling, retirement planning, insurance, banking, budgeting, investing, estate planning and a lot more.
Some personal finance tips or advice:
- save money
- avoid taking loans as much as possible. A loan should always be the last option
- spend less: there’s a hell of a lot of difference between getting wealthy and staying wealthy
- invest wisely and compound your money
- learn financial literacy: read!
- the rich don’t work for money; money works for them
- mind your finances and your own family’s
- Know the history of taxes and the power of corporations
- Don’t lose your mind: learn, observe, grow
- know the difference between luck and risk
- wealth is what you, by any chance, don’t see
Excellent books to read on personal finance:
- the psychology of money by Morgan Housel
- Rich dad poor dad by Robert T. Kiyosaki
- Think and grow rich by Napoleon Hill
- the little book of common sense investing by John C. Bogle
11) How to protect from scams?
Scammers often try to collect personal and financial information from consumers by pretending to be an employee or employees of philanthropic organizations, financial services companies, banks, private money lenders, or online lenders.
But one needs to be very cautious about providing personal information because this is very sensitive information, and its misuse or mishandling can cause great trouble in future.
There can be cases of Unsuccessful payment fees also.
What to do if you feel that the lender is doing something illegal or wrong?
Simple answer: Complaint! As soon as possible, without wasting any time.
Where do you go to complain?
This is the website where you can go and complain: www.consumerfinance.gov/.
What if one has to face a financial problem and cannot make the loan payments?
- contact your lender as soon as possible
- look for federal government programs that can help you
- find information on the CFPB website given above regarding the same
What final words of advice do you have for anyone considering borrowing money from money lenders?
Consider all the options carefully, and go ahead only if you are 100% sure about it.
What do money lenders feel about online lending?
- peer-to-peer lending platforms can’t guarantee returns
- It carries investment risk
- risks that can be as high as in similar, other investment instruments like Mutual Fund, FD and Debentures.
- the risk is diversified through very low amounts of lent
- it does not affect portfolio returns
How did online money lenders come into the picture?
- the covid – 19 pandemic brought in a new era of digital transactions
- people don’t fear transacting online anymore
- . During the pandemic, people have been relying on each other for emergency and unplanned expenses
And that is when digital transactions and online money lenders saw a boost!
Online money lenders are smart millennials who don’t have any complex rule books but have gadgets like smartphones and laptops.
What about Auto loans?
An auto loan has collateral, which means the vehicle’s value is the security for the money lender and that the money lender has protection against default. In other words, the money lender can seize the underlying asset, which means the money lender can take your vehicle.
One of the significant differences between auto loans and other consumer loans is that an auto loan is a secured loan that has to be used to purchase a vehicle.
On the other hand, other personal loans can be used to purchase almost anything in this world and are not that secure.
This is why interest rates on auto loans are generally lower than personal loans. This is because the lender is taking less risk, as they can seize the vehicle to recover the unpaid loan if the situation demands so.
The loans on cars are also fixed period loans. They are paid back over a specific period, for example, one, two, three, four or five years. Several consumer loans also have you (the borrower) choose a particular time of payback period.