It is a legitimate question. If hard money lenders are private lenders, why would banks and credit unions not be public lenders?

First and foremost, the term ‘public lender’ is rarely used in financial circles. The financial sector prefers the term ‘institutional lender’ to describe banks and credit unions. Both types of lenders are financial institutions rather than companies or firms.

On the rare occasion that ‘public lender’ is referenced in financial circles, it generally refers to a government owned lender – whether it be an actual bank or some other sort of entity. The term is used very little for obvious reasons.

Funding Source Is the Key

Naming differences between private and institutional lenders is all about funding sources. When looked at it from the funding angle, the explanation becomes clear.

Private lenders like Utah-based Actium Lending source their funds from groups of private investors. Investors pool their money and entrust it to Actium to loan out on their behalf. By the way, Actium Lending is a hard money lender. I mention that because there are other ways investors can pool their money for landing purposes that don’t involve the hard money business model.

Institutional lenders, like your local bank or credit union, source their funds from depositors. You could be one of thousands of depositors that keep your local bank alive. And if you bank with a national brand, you could be one of millions. Your combined deposits provide at least some of the money your bank lends out.

Read: Why Insurance Is Important: Types of Insurance Explained Simply

Advantages of Private Lending

Whether you are looking for a hard money loan to fund a real estate transaction or a commercial bridge loan to expand your business, there are definite advantages to private lending. Here are just a few of them:

• Speed – Institutional lenders often require from a few weeks to several months to get a loan approved and funded. Private lenders can generally take care of things in a matter of days. That’s a significant difference, especially if you’re pressed for time.

• Loan Criteria – Institutional lenders based their lending criteria on creditworthiness. They strictly adhere to it by law. Private lenders are not regulated by the same laws. Therefore, they base lending criteria on asset value.

• Regulation – Institutional lenders do business the way they do because regulations compel them to. On the other hand, private lending is more lightly regulated. This gives private lenders a lot more flexibility.

There are downsides to private lending as well. Higher interest rates are at the top of the list. Rates on private loans can be several percentage points higher. Private lending also tends to offer shorter terms, ranging from 6-36 months. But there is a silver lining: shorter terms ultimately mean lower total interest payments.

Typical use cases for private lending include business expansion, real estate acquisition, and debt restructuring. Meanwhile, small business loans and mortgages are pretty typical in institutional lending.

Both Have a Purpose

One final thing to note is that both private and institutional lending have a purpose in the grand scheme of things. Each has its pros and cons. Each has its typical use cases as well. Just remember that the key to why private lenders are referred to as such is the source of funds. It has nothing to do with private vs. public ownership.

The post Hard Money Lenders Are Private Lenders – Are Banks Public Lenders? appeared first on Banking Decision.

If you consider taking a hard money loan, there are a couple of things you’ll need to know. In the subsequent sections, we’ve covered what hard money loans are, the loan requirements, how to find the best lenders and everything in between.  

What Are Hard Money Loans?

A hard money loan is a short-term loan popular among real estate investors. The loan is taken from private lenders who charge a slightly higher interest rate than the traditional banks. Most investors who go for hard money loans either need a huge amount of cash fast or don’t qualify for bank loans.

These loans usually have a short repayment period of about 12 to 18 months but can be extended to three years in some instances. Since the loan is mainly used in real estate, the asset to be purchased is used as collateral. 

How to Qualify for Hard Money Loans

The terms for getting a hard money loan usually vary from one lender to another. And since the loan comes from a private individual or company, it provides room for negotiation. However, you should meet some general expectations to qualify for the loan. We’ve rounded up the three most common requirements below. 

Down Payment  

This is perhaps the most important requirement every private lender will expect from a borrower. Having the required down payment is often an indication that you are committed to the deal and are ready to buy the property. The typical down payment is usually in the 25% to 40% range, depending on the type and value of the property. A high down payment reduces the risk the private lender is exposed to, which could mean an increased chance of getting the loan or paying slightly lower interest rates.

Familiarity with Real Estate and Exit Strategy

Most hard money lenders like researching more about their client’s experience in the real estate market. A borrower trying to step into the market for the first time will have a harder time securing the loan than a veteran investor. The real estate market can be volatile, so it is important to carefully consider the risks before taking out a Loan Against Property. So it would make a lot more sense to first understand the market before trying out a hard money loan. Similarly, the private money lender expects the borrower to have a solid exit strategy and contingency plan for repaying the loan if the property delays in the market.

Overall Financial Strength 

Every lender would want to have their money back after the repayment term elapses. However, the market is always subject to several forces, and it’s not guaranteed whether the investor will honor the loan terms. So to shield themselves from adverse risks, most investors will choose to work with established borrowers with other income sources. Some of the best investment ideas in India for money lenders include peer-to-peer lending platforms, microfinance institutions, and non-banking financial companies (NBFCs).

How to Find the Best Hard Money Loan Lenders

Now that you have decided to go for a hard money loan, it’s time to find the right lender. The key here is to do thorough research and talk to other real estate investors. Spending a good amount of time to find a good lender is rewarding for both your current and future projects. Here are some tips you should follow to find the best hard money lender.

• Start your research online. Use google and other social media platforms to find lenders in your area. You can identify legit and trustworthy lenders you can consider working with from online reviews and testimonials.

• Join a community of real estate investors. Here you will interact with people who have interacted with hard money lenders and can help you identify the best ones to work with. Attending their meetings will help you interact with them one on one.

• Reputation. Before making a deal, the most important step is staying away from hard money lender scams. Look for trustworthy referrals and reviews to identify the most reputable lender. It is advisable to use one from your locality as examining their credibility is easier.

• Go through all the terms and requirements. Although most lenders have similarities regarding loan conditions and terms, carefully evaluating each is important. Look out for interest rates, down payments, days to closing, loan duration, and borrowers they lend to. Mobile banking has made it easier for money lenders to reach borrowers, but it is important to be aware of the risks before taking out a loan. Having done this, identify the best one that suits all your needs and expectations.

Is a Hard Money Loan a Good Idea?

A hard money loan can either be a good or bad idea. It all depends on your reasons for taking out the loan. If you are in the real estate market, hard money loans can be quite rewarding. First, this loan will serve you well if you want to secure a home faster before the bank begins processing your mortgage. Second, the loan is great for house flippers who understand the real estate market.

If you take the loan for anything other than investing, a hard money loan would be a bad idea. The high-interest rates and short repayment terms might be quite overwhelming, and you could end up losing your property. 

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