The Difference Between Hard Money Loans and Private Money Loans

To survive in today’s tough economy, business owners and real estate investors often turn to non-traditional lenders to secure financing for operating expenses or property purchases. Non-traditional lenders have emerged as an excellent option for many because they offer loans with fewer restrictions and more generous lending terms than traditional lending institutions such as bank and mortgage brokers. However, many investors and business owners find themselves confused by the difference between hard money and private money lenders.

What’s the Difference Between Hard Money and Private Money?

Both kinds of money loans provide timely financing for investors and business owners with a wide variety of financing needs. However, there are important differences between these two types of loans. Understanding how these types of loans differ is key to picking the financial product that will best meet your needs.

Basics of Hard Money Lending

Hard money loans are offered by businesses that specialize in alternative lending. While the funding for these kinds of loans often comes from private sources, the lenders are regulated and specialize in working with real estate investors, private borrowers and business owners. Like private money lenders, hard money lenders focus on borrower equity instead of credit scores to make lending decisions.
However, hard money lenders generally have set approval criteria and loan terms. They work with borrowers who can’t find financing elsewhere, but they don’t negotiate extensively about how loans will be repaid. Instead, they rely upon industry-standard formulas to determine interest rates and repayment plans that allow profit while also providing fair terms for borrowers.

Basics of Private Money Lending

As their name suggests, private money loans are offered by completely private lenders. They generally do not operate as businesses and often do not advertise that they have funds available to be lent. Most private money lenders are also unregulated and don’t have to conform to lending industry regulations regarding loan rates or terms.

Approval criteria for loans can also vary widely between private money lenders. Because there are no set, standardized criteria, borrowers often have little idea whether or not they’ll be able to access private money funds. Securing these types of loans tends to require heavy negotiation regarding interest rates and repayment plans.

Should You Choose Hard Money or Private Money Loans?

Choosing between the two may be difficult, but many borrowers find that hard money loans are much more beneficial because they are offered by regulated businesses. Borrowers can review the criteria of individual lenders before turning in their applications so that they have a decent idea of whether or not they’ll be approved for financing. These loans also offer fair, industry-standard terms that benefit borrowers.
Remember that there are different types of hard money loans available:

  • Gap loans help business owners meet deficiencies between their available funds and business expenses.
  • Fix-and-flip loans help borrowers who want to buy distressed properties to rehab them and sell them at a profit.
  • Commercial rehab loans help those who want to buy and repair distressed commercial properties.