What’s the Difference: Private Money vs. Hard Money Loans
If you’re not a lender yourself and don’t work for a bank, it can be unclear what the difference is between private money and hard money loans. Before proceeding, it’s important to be aware of several major differences between the two types. Knowing the distinction between the two will allow you to get all the necessary answers to your questions before making a decision.
Hard Money
Many experienced investors use hard money lenders because they know the benefits of using one. Hard money lenders are semi-institutional and tend to be organized and licensed to lend to investors in real estate. Hard money loans are secured by real property. Also known as “last resort” or short-term bridge loans, hard money loans are used primarily in real estate transactions. Generally, the lender is an individual or company rather than a bank.
These types of loans take a different approach because they base their lending on collateral to secure the loan. Therefore, they will be less concerned with your ability to repay the loan because they can use the collateral to make the money back. Hard money lenders have to jump through more hoops than private lenders, though it is still far less than traditional financing requires. This is why savvy investors continue to opt for hard money loans.
Private Money
Private money loans are incredibly flexible. These come from somewhere other than a bank or credit union, such as a friend, family member, or business partner. Anyone who’s interested in an investment and has the money to contribute could be brought in as a private money lender. The funding you receive is used to buy a property, consolidate debt, do home improvements, or do anything else that requires a large purchase. You pay the money that you’ve borrowed back as you would any other loan—in installments with interest.
Different private lenders will charge different amounts of interest. For instance, if a family member gives you a private money loan, the interest rate may be much lower than if a colleague lent it. In simpler terms, the lender decides how much interest to charge. In some cases, private money loans aren’t as regulated as other loan types, which could cause issues if the lender and loan recipient are close friends who are trying to help each other out and something goes wrong. However, when properly executed, this option can be a good deal at a lower cost to the loan recipient.
There are similarities and differences between the two types of money loans. Both offer advantages and disadvantages based on the circumstance. Understanding what the difference is between private money and hard money loans will allow you to make decisions on an investment-by-investment basis. Hard money tends to offer more security and know-how, but private money loans can be easier with the right situation. Therefore, it’s essential that you do your research. For expert guidance, it’s worth consulting Streamline Mortgage’s hard money lenders in Henderson, NV, to determine which loan type is ideal for your position.