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Private money loans vs. hard money: What's the difference?

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If you’re unable to qualify for a loan at a traditional lending source like a big bank, you’re not alone. Many people are unable to meet the strict and often unrealistic lending requirements set by these entities. However, this doesn’t mean that you’re stuck and unable to get the money you need to buy a property. Instead, there are alternative lending options out there, including private money loans and hard money loans. Here’s what you need to know about each of them and how you can choose the right option:

 

What Is a Private Money Loan?

A private money loan is a loan given by an individual either for investment purposes or to purchase an asset like a home or a car. This type of loan could be given to you by a family member or a friend. A private money loan could also be given to you by an angel investor if you have a solid business idea worth investing in. This type of loan doesn’t involve traditional lending institutions like big banks for a more personal, flexible, and accessible lending option. 

 

What Is a Hard Money Loan?

A hard money loan is a loan designed for speed and accessibility. This is a great option if you need cash fast or if you don’t have the best credit history. This is because hard money loans don’t focus on requirements typically prioritized by traditional lenders, such as credit score and income. Instead, hard money loans focus on using your assets as collateral. In the event that you’re unable to repay the loan, they will simply take and sell the assets that you signed over as collateral.

 

What Are the Benefits of Each?

While there are benefits to using both private money loans and hard money loans, the correct choice for your loan will depend on which type of loan satisfies your needs. Knowing the idiosyncrasies of each can help you determine whether either option is right for you, or if you’ll need a quicker option with lower costs. 

The benefits of private money loans include:

  • Access: Big banks and other traditional lenders often have restrictive requirements that prevent many people from applying or getting approved for a loan. However, if you have a below-average credit score or are trying to build your credit, a private loan may be a better option for you, thanks to less restrictive requirements. 
  • Application: In many cases, the application process for a private money loan is nearly non-existent. This is in contrast to the extensive application process for traditional lenders that often requires submitting piles of documents showing your employment and financial statuses. So instead of spending a whole lot of time and effort preparing your loan application, you can get to work on securing your property.
  • Flexibility: Since private money loans aren’t given by restrictive lenders like big banks, they offer more flexibility. Traditional lenders tell you what you can and cannot do with the money. Private money lenders, on the other hand, generally give you leeway to spend the money as you wish. 

The benefits of hard money loans include:

  • Efficiency: Hard money loans can get you money quickly in contrast to loans from big banks that can get caught up in processing and approvals along the way. For instance, the best lenders will be able to get you your money within seven business days.
  • Accessibility: Hard money loans are more accessible in that they often don’t require perfect credit reports or consistent employment histories. Instead, hard money loans focus on the value of your collateral. As a result, those with poor or nonexistent credit histories can access funds by using hard money loans.
  • Flexibility: Like private money loans, hard money loans are a more flexible financing option that gives you more freedom and leeway in terms of what you can do with the money. Oftentimes, big banks place tons of restrictions on how you can use the money. You can avoid many of these restrictions by going with an alternative lending option like a hard money loan. 

 

How to Choose the Right Loan Option

Everyone’s financial situation is different, and as a result, the right loan option for you may not be what you’d initially expect. For this reason, you need to conduct diligent research about different loan options that may be a better fit, save you money in interest, and get you cash quickly. Thankfully, we have done a lot of the work for you to make it incredibly easy to choose the right loan option for your family or business. 

While private money loans and hard money loans are great options for those with poor or unsubstantiated credit histories, they come with high costs. If you’re trying to purchase an investment property and looking for a quick and beneficial option with lower costs, you may want to consider going with a bridge loan instead. Many lenders will allow individuals to borrow up to 60 percent of the value of the property they are using as collateral for their loan, at interest rates between 7.5 percent and 10 percent — lower than those seen for both private and hard money loans. 

Additionally, bridge loans can be closed quickly — even within ten business days! Finally, bridge loans come with fewer qualification requirements, making them accessible for those who are trying to build or improve their credit. 

Specifically, bridge loans are a great option for foreign investors without a substantial credit history in the United States or access to commonly required documentation such as W-2s, income tax returns, or 1099s. Additionally, bridge loans may be a good option for foreign investors purchasing a new investment property before selling an existing one, and they’re popular amongst developers and big corporations trying to fund multi-million dollar real estate purchases. Of course, they’re just as useful for local real estate investors looking for capital to tide them over until they can find more permanent financing.

In any case, choosing the right type of loan for your financial situation is only the first step — you then have to find the right lender. 

 

How to Find the Right Lender

It can be hard to find a lender that offers alternative lending options like hard money loans, private loans, or even bridge loans. However, no matter which loan option you choose to go with, you should make sure that your lender is transparent, responsive, and helpful. 

Vaster Capital offers all of these qualities and more with their top-notch bridge loan financing options that have funded some of the biggest real estate projects for premier investors. That being said, we also work with everyday homebuyers who are simply looking for a way to get into their new home as soon as possible. We are always up front about our terms, conditions, and costs while providing top-notch customer service through every step of the process from application to repayment. 

 

Wrap Up

While private money loans and hard money loans have their benefits, there are other loan options to consider like bridge loans. For individuals looking to finance an investment property quickly with lower costs than those associated with private money loans and hard money loans, bridge loans may be a more attractive option. Make sure to do your due diligence and talk to the lending experts at Vaster Capital for the best possible loan advice to make your real estate dreams a reality. 

 

Sources:

How To Build Credit The Right Way | MoneyUnder30.com

What Documents Do You Need To Apply For A Mortgage? | Zillow

Family Loans: Benefits And Pitfalls Of Borrowing From—Or Lending To—Family | Forbes