High risk loans are offered by hard money lenders on financially distressed properties. These loans generally don't conform to the standards followed by conventional banks. Private money lenders usually don't give much weight to the credit score of the borrower and if fact give more importance to the value of the collateral property. Most of these lenders do not even consider the credit rating of the borrower.
Typical private lenders almost always have lien rights on the particular collateral property. This implies that in case of default in making payment by the borrower, the collateral property will be transferred to the person who offered the loan to the borrower. Since the original loan amount is 30 to 40 percent lower than the quick sell value, the lender is in a far better position to recover his lost money and may even come out ahead if the market value of the property increases or remains the same, in the event the borrower fails to pay the loan money. But when the market value drops, the lender would still be likely to lose a great deal of money.
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The loans that private residential lenders would grant generally have a higher rate of interest. This is because of the higher risk associated with these types of loans. Often the borrower is in financial distress, may have a bad credit score, has gone through bankruptcy, or meets all of these qualifications. So conventional lenders don't usually like engaging in this type of high risk lending. That means that residential money lenders are almost always local private lenders who are willing to incur the extra risk for the reward of higher interest on the loan, or quick profit should the borrower default.
Although hard money lending has been around for many years, many people think of it as a new idea. The credit industry had changed a lot in the 20th century. Before it was always very difficult to obtain loans for distressed commercial and other properties. Because of this difficulty, a new solution arose from the market place. Hard money lending was born.
Hard money lenders don't offer illegal services but they are certainly not the first choice of people who want to borrow money against collateral property. There are certain situations when a large quantity of capital is needed by a business or a person that is not offered by bank or other lending institution. In such a case, a high interest loan from a private money lender is the only option.
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