A Guide to Private Money Lending
The terms “hard” or “private money” are typically used to describe a company or an individual that’s not a bank but lends money anyway, usually under non-traditional qualifying terms.
This type of lending relies heavily on risk, which means the fees around private money lending are typically higher than other, more traditional forms of financing. However, these companies are more apt than conventional lenders to approve your loan so long as you can provide adequate collateral, with the money sourced from private investors.
Private money lending has received its share of criticism over the years, and there are questions if hard money and private money are in fact the same. The truth is that the legal difference between the two terms hasn’t been defined.
So lenders call themselves whatever they wish according to their preference, be it loan originators, loan brokers, or even mortgage brokers.
Hard money was the term used in the old days when the financing industry wasn’t quite as stable as it is today. These days, we call it private lending, since it better defines the regulations it follows.
Please take note that in this article, we use “hard money” and “private money” interchangeably. Continue reading to learn more about private money lending.
How “Hard Cash” or “Hard Money” was Coined
Hard money or hard cash was used back in the day to refer to loans that were particularly difficult to secure from traditional lending sources, like banks. These terms can also apply to the asset formally declared as collateral. When a borrower declares a property or something of value as collateral, this property goes “hard” as collateral against the borrowed money.
These days, private money lenders are becoming more popular. This lending practice best describes the business model of companies (or individuals) that grant loans to people who don’t qualify for traditional bank loans.
Who Private Money Lending is For
Private money loans are typically the option of last resort for businesses or individuals who don’t qualify for a bank loan — although apparently some borrowers opt for private money lenders over banks because the funding solution approves loans faster and doesn’t require a ton of paperwork. Private money lending also offers more options when it comes to collateral, unlike banks, which can be very specific about what they’ll accept.
By definition, private money lending is the business of lending money to fund startups and certain investments, loans which are secured via real estate or vehicles. Acquiring capital is arranged through private lenders and/or personal investors.
When one speaks of private lenders, they’re typically referring to companies that have their own group of personal investors who issue loans, similar to a bank. Personal investors, on the other hand, are individuals who have their own capital, or a group of people who gather their funds together for the purpose of issuing loans.
When to Turn to Private Money Lending
There are several reasons why some people and/or businesses opt for hard money or private funding. However, you’ll likely have few alternatives to private funding if you:
- Have poor or no credit
- Have an outstanding debt-to-income ratio
- Need funds for things that banks refuse to finance, such as construction, land, and properties situated in places with high default rates
- Have been refused real estate-based loans because you’ve reached the limit allowed to be funded
- Are looking for a higher loan-to-value (LTV) than banks offer
- Are looking to leverage your available money for several deals or loans instead of putting it all for a single payment
- Have a short term need for a loan, especially larger amounts
- Need urgent matters funded such as rehab, bills, or repairs
- Need to close your real estate investment immediately
There could of course be other reasons not listed here. However, whatever it is, there’s likely to be a private money lender willing to approve your loan — for a fee.
Finding the Right Lender
Yes, private money lenders are a dime a dozen, but keep in mind that they have different terms and rates, which are invariably going to be dramatically higher than the rate you’d get from a bank or mortgage company.
As such, you may fare better by trying to look for a private lender on your own. Start by asking your friends and relatives if they know of a trustworthy lender, or try looking for a private investor through real estate mortgage brokers.
A real estate mortgage broker is in no way connected to or employed by a lender. This individual is simply an entrepreneur who can help match you with the right investor. He or she will communicate with you throughout the process and coordinate and package your loan from beginning to end.
Banks are everywhere, but when you’re suddenly finding yourself constantly being denied a loan, there is almost always going to be a private money investor or lender willing to help you out — again, for a substantial fee.
You can also find these lenders online through directory services. Once you find your potential lender, try to look for and reach out to some of their previous clients. It’s critical for you to know the reliability of a lender so you can acquire funding at a rate you can afford.