Hard money loans are a common way to finance a real estate project. In many cases, these loans can be used to purchase properties that banks will not finance due to their riskier nature. However, if you default on one of these loans, there will be consequences. This article looks at the repercussions of defaulting on a hard money loan and how they differ from other types of financing options.
You can lose your property
If you can’t make the payments on a hard money loan, the lender has the right to take possession of the property that serves as collateral for the loan. This means you could lose your home or business if you can’t come up with the cash to pay off your debt.
You are likely to face legal action
Hard money lenders are often more aggressive than traditional banks when it comes to collecting on loans. If you don’t repay your loan, the lender will likely take legal action to recover your losses. This could lead to wage garnishment, asset seizure, and even bankruptcy.
Your credit will suffer
A hard money loan is a short-term, high-interest loan. This means that if you can’t make your payments, you’ll end up with high-interest debt that will hurt your credit score. This could affect your ability to get loans in the future and may even prevent you from renting an apartment or buying a car.
You will miss out on a key investment opportunity
Hard money loan financing is expensive. If you can’t pay your debt, it will represent a significant loss of potential income that could have been used to grow your business or fund future investments.
You can lose your capital
When you take out a hard money loan, you are usually required to put up some form of collateral. If you can’t make your payments, the lender has the right to sell that collateral to recoup its losses. This could mean losing all or part of the equity you have built up in your property.
You will end up in a stressful situation
If you default on your hard money loan, things are likely to get very stressful. You may be facing legal action that requires the hiring of an attorney and could lead to bankruptcy or foreclosure of your property.
That’s why it’s so important for borrowers to make their payments on time; if they cannot do this, there will be significant consequences in the future.
You may need hard money loans again in the future
The repercussions of not making payments on time with a hard money lender may prevent you from obtaining loans in the future. This means that even if you manage to save enough capital for another project, borrowing funds can become extremely difficult without a good credit history and high income levels.
It can ruin your business relationship with the lender
If you have a good relationship with your hard money lender, it may be possible to work out a payment plan that allows you to avoid some or all of the consequences listed above. However, if you don’t pay your debt as agreed, you could ruin this relationship and make it difficult for them to borrow money in the future.
As you can see, there are several consequences to defaulting on a loan, paying on time will help you avoid all of these unfortunate outcomes and save your business.