How to Choose Hard Money Loans vs. Private Money Loans
Determining creative ways to fund your next investment property has probably made you develop some interest in hard and private money loans. Hard and private money loans are an excellent fit for wealthy investors looking to secure funding for a real estate venture quickly, without any of the hassles attributed to bank financing. However, it is essential to be aware of the differences between private and hard money loans before making your financial decision.
Wondering what is the difference between hard money and private money? And which lender is better – Hard money or private money? We’ll dive into these questions and outline the differences between the two below.
What is Hard Money?
A hard money loan is a loan that’s secured through the use of a ‘hard asset’ as collateral, with one of the most common assets being real estate. So, a hard money lender is an asset-based lender who uses an asset’s value to decide on both the loan amount and terms.
While hard money lenders are not banks, they are organized money lenders that still operate as loan companies. They utilize many of the same criteria traditional lenders use to determine who gets a loan.
Pros and Cons of Using a Hard Money Lender
Pros of Hard Money Lenders
- Knowledge/Organized – When you choose a hard money lender, you work with a licensed company with more experience issuing loans.
- Flexibility– You can negotiate the loan terms depending on your circumstances
- Quick Approval – Since fewer guidelines and criteria exist, funding can be received quickly (7 days).
Cons of Hard Money Lending
- Shorter Payback Period – Repayment periods are typically short (between 6 months and 24 months long)
- High Fees and Interest Payments – Lenders usually charge higher interest rates than a traditional loan (Anywhere from 6% to 8%)
- You use the property as collateral.
What is a Private Money Lender?
Generally, a private money lender can be anyone, whether a single individual or a group of people, who decide to loan you money based on their terms. A private money lender could be a family member, a friend, or a business that believes in your real estate projects and is hoping for some returns.
Unlike hard money lenders, the terms can vary significantly from one private money lender to another because a private lender can use whatever criteria they are comfortable with when lending out money. Since private money lenders can essentially be anyone, they may not be as experienced as hard money lenders.
Essentially, every private money lender is a hard money lender but not every hard money lender is a private money lender. Private money lenders are hard money lenders that operate without general guidelines or criteria.
Pros and Cons of Using a Private Money Lender
Pros of Private Money Lenders
- Leverage – Most hard money loans offer up to 100% financing
- No Minimum Credit Score – Credit is not the primary factor considered for approval
- Quick Approval – Since the criteria are not that difficult to meet, this speeds up the process for fast funding.
Cons of Private Money Lending
- Higher Fees and Interest Rates – Borrowers may face high-interest rates and high fees
- Personal Relationships at Stake – If something were to go awry with the loan, it could strain your relationship with the lender.
- Shorter Repayment Schedule – Private lenders may want you to repay their loan quickly
Hard Money Loan vs. Private Money Loan – What’s the Difference?
The difference between hard money loans and private money loans isn’t that clear. In fact, many real estate investors believe them to be the same. However, while hard and private money loans have many similarities, there are some significant differences investors need to be aware of.
The main differences between hard money lenders are private money lenders are:
- Loan Terms: Hard money lenders have stricter criteria than private money lenders. They generally stick to specific rules around the points, interest rates, and loan terms, whereas private money lenders can be flexible on all loan aspects.
- Licensing: Hard money lenders are licensed to lend money, whereas private lenders don’t have the license to lend money.
- Locating the Lender: Hard money lenders are easier to find than private lenders because they widely advertise their services. You can easily find California hard money lenders through directories or advertisements to provide hard money loans in California.
Which Loan is Best for Your Real Estate Investment?
Hard money loans vs. Private money loans – Which is right for you? As you can see, hard and private money loans differ slightly and have different strengths and drawbacks.
Hard money loans are typically used by:
- House flipping professionals who need access to funds quickly
- Rental property investors who are buying investment properties to rent out to tenants
- Real estate investors who are doing ground-up construction projects
While you can use private money loans for the same purpose as hard money loans, for the most part, private money lenders do not advertise, so finding one can be more challenging, and they will more than likely need to find you or be found by referral.
In the internet age, however, it’s easier than ever to find hard and private money loans that suit you, your needs, and your budget. RTI Bridge Loans, for example, is here to help all sorts of clients with their short-term hard money and private money loan needs.
The Bottom Line
It would be best if you decided on whether to choose between hard or private money loans on an investment by investment basis. However, hard money loans offer security and industry know-how that your average private lender cannot. Therefore, applying for a hard money loan would be a wiser choice unless you and your private money lender are experienced with real estate investing.
Our hard money lenders at RTI Bridge Loans can gladly navigate you through the factors to consider and suggest the best options based on your investment venture. Feel free to contact the hard money experts today! You can contact them online or call (562) 857-2285.