What Is a Hardship Loan?
A hardship loan is a loan that covers unfortunate financial shortages. These financial shortages are subject to an individual’s income going down or expenses increasing. A hardship loan is very distinct from the other types of loan as it’s designed to meet specific individual needs. With a hardship loan, you are only eligible when you aren’t in a position to pay any of your basic bills
Note that a hardship loan can’t be utilized in buying luxurious or secondary needs such as cars or business expansion. It’s also a loan provided by private investors rather than banks and credit unions.
What are hard money lenders charging?
It’s in the public domain that the rate at which a private investor charges for a loan varies from one investor to the other, however, with a slight variation. Depending on the unavoidable circumstance an individual is undergoing, the hard money lenders will decide the rate they will charge. Below is a list of different hard money loans and the expected loan charges. Secured Hardship Personal Loan Individuals with a secured hardship loan must have collateral before securing a loan. Most lenders will put less strict qualification guidelines with collateral in place. This makes it easy for borrowers with low credit scores to acquire quick approval. The good thing about secured hardship personal loan, it has lower interest rates, larger loan amounts, and longer terms. However, lenders in possession of your property can claim it and sell it to compensate for their losses when they cannot pay back their money.
Unsecured Hardship Personal Loan
Unlike the secured hardship loan, an unsecured personal hardship loan doesn’t require collateral. The lenders must assess your financial situation and credit score to determine your eligibility and the amount of money you can borrow. It’s an implication that if you have a poor or low credit score, you might struggle to acquire an unsecured hardship personal loan, as the lenders are very strict with the requirements. Unsecured hardship personal loan is associated with several benefits as you don’t need a valuable item to use as collateral. However, your lender will be taking more risks as there’s no collateral, implying the more risks faced, the higher your interest rates and annual percentage rates develop.
401 (k) Hardship Withdrawal
Depending on an individual’s situation, you can take a short-term loan from your 401 (k) retirement plan. It’s a loan offered by the employers for specific reasons, which include:
College Degree Funding
Primary Residence Repair
Avoiding Foreclosure or Eviction
Covering Funeral Expenses
Paying off qualifying medical bills
It’s advisable to discuss the hardship situation with your plan administrator before securing this loan to ensure that you can meet all the eligibility requirements. The advantage of 401 (k) hardship withdrawal is that you can avoid taking high-interest loans. Also, you don’t need to meet any lenders’ requirements. On the downside, you might be required to pay a penalty fee or taxes when you withdraw from 401 (k).
Home Equity Loan
To own a house or a home, you need to have money, but at the same time, did you know you can get money from your house in case of emergencies? If you have a property and a significant amount of money, you could secure loans in hard times when you desperately need money. The good thing about home equity loans is that they offer fixed interest rates, which are mostly lower than personal loans. It’s also accompanied by longer terms which imply repaying the loan would be easier. On the other hand, this could lead to one taking substantial debts. It might also prove too challenging, especially when individuals struggle to pay their mortgages. In the case of default, individuals risk losing their homes.
Payday Alternative Loan
The common payday loan offers quick money but at a very high-interest rate. A payday alternative loan is a short-term cash advance automatically paid from your bank on the next payday. These loans are notorious and considered predatory as the terms are abusive and unfair to the borrower. Most individuals who get into payday loans get trapped in the cycle as they can no longer repay their loans and the additional fees on the required dates. Remember, you are left with deficit funds for the next month after paying off your loan, as the rates charged are very high.
How do I choose a mortgage or a hard money lender?
Below are five factors to consider when choosing a hard money lender:
Understand interest rates versus value: Most private money lending industries have less regulation from the federal reserve bank. It implies terms such as approval time, down payment, interest rates, and requirements widely vary from one lender to another.
Pay attention to the geographic location: In most cases, dealing with lenders within your state is advisable. This is because the lenders are likely to have a better insight into the local financial situations; hence closing the deal would be much easier’
Check reviews about your lender: In the current state, clients will not keep to themselves the experience they get from lenders. They will always leave either a good or a bad experience comment review. When sourcing online hard money lenders, you check out their reviews from their websites.
Consider approval time: Conventional loans take up to 45 days, but with hard money lenders, the average time required is one week. In other circumstances, you might have your loan approved in 24 hours.
Ensure they are licensed: The private lending industry involves large sums of money. This being the case, the worst thing one will want to avoid is doing dark transactions. The best way to prevent this is by having the lender’s business licensed, which will help lenders and borrowers do a clean deal
What exit strategies are hard money loans best used for?
Below are some of the expected exit strategies for hard money loans:
Selling the property: It’s one of the common exit strategies in hard money loans, as many borrowers will do so to buy a property, improve it then sell it at a profit.
Getting a new loan: You can get an additional hard money loan; however, this is recommended when all other options are not viable. It is considered the last option as the purpose of the loan is diverted from the original aim.
Refinance: With the investor’s plan not to flip a property but to utilize it for a rental property, refinancing might be the best option for exit.
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