Both hard money loans and lines of credit are great ways for additional funds; however, why you need either one of the above will depend on why you need the funds. Hard money loans and lines of credit offer a leeway to borrow from lenders who may or may not consider creditworthiness, lender-borrower relationship, and financial need.
Find out below the differences between hard money loans and lines of credit to gauge which one works best for you.
What Is A Hard Money Loan As Opposed To Lines Of Credit?
A hard money loan is a type of asset-based lending, also referred to as “last resort” or short-term bridge loans secured by real property. The lenders of these types of loans are generally companies or individuals and nonbanks lending primarily to real estate transactions.
Hard money lenders- companies and individuals, see potential value in the risk of these loans that have terms mainly based on the value of property used as collateral, not on the borrower’s creditworthiness.
The deal with hard money is finding a property to flip, renovate, resell and pay off the loan; the flipped property acts as collateral- usually within a year or less.
The lender takes a higher risk since hard money loans are higher than financing through banks or government lending programs. But, the increased expense caters to faster capital access, a flexible repayment schedule, and a less stringent approval process.
Hard money loans are lifesavers in sticky situations, short-term financing, and help borrowers with substantial property equity but poor credit. Since borrowers tend to pay off these loans quickly, this time offsets the higher cost of hard money loans.
- Quick approval process as compared to the traditional bank loans or mortgage due to the private investor’s focus on collateral rather than borrower’s financial position
- Lenders spend less time sorting through borrowers’ documents, loan applications verifying income, financial documents, etc.
- Private hard-money investors are not majorly concerned about loan repayment because there is a chance of a much greater deal for them when reselling the property when a borrower defaults.
- Hard money loans have lower LTV ratios than traditional loans: about 50% to 70% and 80% for regular mortgages. However, this ratio can go higher if the flipper is an experienced flipper.
- Hard money loans interest rates are much higher. As of 2020, the average interest rate for a hard money loan was 11.25%, with varying rates from 7.5% to 15% for the United States.
- Hard money lenders might fail to provide financing for a property occupied by its owner due to compliance rules and regulatory oversight.
What Is A line Of Credit?
However, a line of credit takes on a different route, with the borrower having a set of credit limits like with a credit card. The lender expects the borrower to make regular payments comprising a principal and an interest.
Unlike a loan, the borrower has unlimited access to the line of credit while it is still active. Though approval for both types of these loans depends on the borrower’s credit rating, financial history, and lender relationship, they still have several differences.
A line of credit is a flexible, revolving credit used for any number of reasons, unlike a loan borrowed for a specific purpose.
Once a financial institution approves a borrower’s line of credit, the institution sets a credit limit that the borrower can use, in part or whole, over and over again. An individual’s line of credit usually works like a credit card and, in some instances, like a checking account.
A checking account allows you to make payments and purchases while linking the bill to a debit card or writing checks against the account.
A borrower can use the funds in the line of credit as frequently as they deem necessary as long as the account is up to date and has available credit to use.
For instance, if you have a line of credit of $10,000 limit, you are free to use the amount in part or as a whole for whatever reason whatsoever. If you carry a $7,000 balance, you can still use the remaining $3,000 at any given time. If you pay off the $7,000, you can access the full $10,000 again.
Lines of credit tend to have smaller minimum payment amounts, higher interest rates, and lower dollar amounts. The borrower has to make monthly payments inclusive of both interest and principal.
These types of credit are known to create more immediate and larger impacts on consumer credit scores and credit reports.
Another line of credit factor is that you must be willing to allow interest to accumulate only after taking cash against the credit line or once you make a purchase.
Line Of Credits – Different Types
Below are three common types of credit lines:
A Personal Line Of Credit
A personal line of credit is an unsecured line of credit, meaning it does not have collateral securing it. Personal credit lines require the borrower to have a higher credit score but a lower credit limit and higher interest rates.
Most banks and other financial institutions usually issue personal credit lines indefinitely to borrowers.
A Business Line Of Credit
Businesses mostly use a business line of credit on an as-needed basis. Banks or financial institutions consider the business’s market value profitability score together with the risks before issuing out the line of credit.
A business credit line can either be unsecured or secured depending on the requested credit though interest rates tend to be variable.
Home equity line of credit- HELOC
Home equity line of credit (HELOC) is a secured credit facility usually backed by your home’s market value and considers the amount owed on the borrower’s mortgage.
The credit limit is usually 80% of the market value of your home, less the amount owed on the mortgage for HELOC’S credit limits.
Most HELOCs have a drawing period of 10 years; during this time, the borrower is free to use, pay and reuse the funds as much as they want. HELOCs are secured, hence come with lower interest rates than the other two lines of credit mentioned above.
Contact the BBLaw Firm today to get a free trial and consult with our team of professionally trained lawyers for any lawsuit concerning loans. Whether you require a qualified attorney to concisely and clearly explain the terms of your HELOC or any other loan disputes, we will help you negotiate different interest rates and withdrawal periods with the lending institution.
In addition, the team at BBLaw firm provides legal representation and other legal services to resolve your dispute efficiently.