Hard money loans are a common way to fund a real estate project. In many cases, these loans can be used to buy properties that banks won’t finance because of their riskier nature. However, if you default on one of these loans there will be consequences. This article discusses the repercussions of not paying back a hard money loan and how they differ from other types of financing options.
You May Lose Your Property
If you can’t make your 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 back your debt.
You’ll Likely Face Legal Action
Hard money lenders are typically more aggressive than traditional banks when it comes to collecting on loans. If you default on your loan, the lender is likely to pursue legal action in order to recoup their losses. This could lead to wage garnishment, asset seizure, and even bankruptcy.
Your Credit Will Suffer
A hard money loan is a high-interest, short-term loan. This means that if you can’t make your payments, you’ll end up with a high-interest debt that will damage your credit score. This could impact your ability to get future loans and may even prevent you from renting an apartment or buying a car.
You’ll Waste a Key Investment Opportunity
Hard money loan financing is expensive. If you can’t pay back your debt, it will represent a significant waste of potential income that could have been used to grow your business or fund future investments.
You May Lose Your Equity
When you take out a hard money loan, you’re typically required to put up some form of collateral. If you can’t make your payments, the lender has the right to sell that collateral in order to recoup their losses. This could mean losing all or part of the equity you’ve built up in your property.
You’ll End Up in a Stressful Situation
If you default on your hard money loan, things are likely to get very stressful. You may face legal action that will require hiring an attorney and could lead to bankruptcy or foreclosure proceedings against your property.
This is why it’s so important for borrowers to make their payments on time; if they can’t do this, there’ll be significant consequences down the road.
You May Need Hard Money Loans Again in the Future
The repercussions of not making timely repayments with a hard money lender may prevent you from getting loans in the future. This means that even if you manage to save up enough capital for another project, borrowing funds might become extremely difficult without good credit history and high-income levels.
You 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 repayment plan that allows you to avoid some or all of the consequences listed above. However, if you don’t repay your debt as agreed upon, you could ruin this relationship and make it difficult to borrow money from them in the future.
As you can see, there are several consequences for defaulting on loan, paying on time will help you avoid all of these unfortunate outcomes and save your business.