How Private Lending Works & Why To Avoid Hard Money Lenders If You Face Foreclosure

Text-only Preview

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 vehicles 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-signers 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."

mortgage brokers