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 may 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 raise 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 default on 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 loan with high interest. 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 off your debt, it will represent a significant loss of potential income that could have been used to grow your business or finance future investments.
You can lose your capital
When you get a hard money loan, you are usually required to put up some type of collateral. If you can’t make your payments, the lender has the right to sell that collateral to recover your 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 on your property.
That’s why it’s so important that borrowers make their payments on time; if they cannot do this, there will be significant consequences down the road.
You may need hard money loans again in the future
The repercussions of not making your 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 good credit and high levels of income.
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 off your debt as agreed, you could ruin this relationship and make it more difficult to borrow money from them in the future.
As you can see, there are several consequences for not paying a loan, paying on time will help you avoid all these unfortunate outcomes and save your business.