How Private Lending Works & Why to Avoid Hard Money Lenders if You Face Foreclosure
If you seek bad-credit lenders to help you pay for credit card or other personal debt, you have two viable options. If you need a short-term loan from a private lender to fund a real estate deal and you happen to have bad credit, you may be able to get a "hard money" loan. This article discusses both types of bad-credit lenders.
Personal Bad-Credit Loans
A personal bad-credit loan may be used to consolidate credit card bills, medical debts, or payday loans. A personal loan that is not attached to collateral is called an unsecured loan. This is in contrast to a secured loan, which is tied to a vehicle’s title, real estate, or some other valuable object. A common characteristic of all unsecured loans is a higher interest rate than secured loans.
You face a difficult situation if you seek either a secured or unsecured loan and have a bad credit score. A credit score is designed to be a predictive statistic that estimates your chances of repaying a loan. A lower credit score indicates a higher chance you will not repay the loan. Therefore, a bank or credit union looking at the loan application of a person with a low credit score will likely reject the application outright.
Other lenders, however, may see a person with a low credit score as an opportunity. For example, peer-to-peer lenders offer an array of loans to people with low, medium, and high credit scores. The interest rate of these loans corresponds with the amount risk involved. A person with a low credit score is a high-risk lender, and will pay a high interest rate. The opposite is true for a person with a high credit score. Therefore, if you have a low credit score, consider peer-to-peer lenders as one potential source for your loan.
Another loan source are your friends and family. If a family member or friend cannot fund you directly, then consider asking them to help you by co-signing on a personal loan. The danger here, however, is if you cannot repay the loan the co-signer is forced to make the payments. Co-signing on a loan may strain your co-signer’s credit score, too. A co-signed loan may also make it impossible for them to qualify for a vehicle loan or mortgage. Be a conscientious friend or family member by disclosing all of these risks to your co-signer before you place a loan application in front of them to sign.
Private Money Loans
Private money loans are usually used in real estate deals where a person (or organization) that wants to own a property for a short period of time will contact a local private investor to lend enough money to buy the land and develop the property. Lately, private money lenders moved into lending money to individuals who buy foreclosed properties needing significant remediation. These individuals will own the property long enough to repair it, and then will sell it for the market value.
The table below compares private loans, which are also called "hard money" loans, with "soft money loans."
|Soft vs. Hard Money Loans|
|Soft Money||Hard Money|
|Also Known As||Mortgage or deed of trust||Private money or bridge loan|
|Purpose||Purchase residence by owner-occupant or a long-term investor.||Purchase distressed or REO property that requires moderate amount of remodeling.|
|Loan Amount||Up to 95% of fair market value.||Up to 70% of after-repaired value.|
|Typical Term||15 - 30 years||6 - 24 months|
|Interest Rate||Varies||Varies, often double current soft rates|
|Points||1 - 3||2 - 10|
|Credit Score||~620 FICO for FHA, but varies||None|
|Time to Funding||>30 days||<30 days|
|Source||Broker or direct lender such as a bank||Local private investor|
Used as intended, hard-money loans serve their purpose — an alternative to long-term financing offered by traditional mortgage brokers and direct lenders. However, when the housing bubble burst, some less than scrupulous hard money lenders became involved in schemes where hard money was used to help a homeowner avoid bankruptcy. Unfortunately, the terms unwitting homeowners agree to are not disclosed fully, and homeowners lose their homes to these scam artists.
If you seek a hard-money loan to avoid foreclosure, read the Bills.com article Options to Stop Foreclosure. This article describes four proven alternatives to foreclosure that do not involve losing your home to a scam artist.
If you want a private lender to consolidate your personal debts, then think outside the box and consider an alternative to a loan. Plug your debts into the Bills.com Debt Coach to learn if something other than a loan will meet your needs. Debt Coach is a no-cost, no-nonsense tool that might help you resolve your debts without a loan.