If you need financing for a real estate investment project, you’ve probably come across private lending and hard money loans in your research.
Both these options are alternatives to traditional bank loans, but they work differently and have their own unique pros and cons. Here, we’ve outlined the key differences between the two, to help you choose the best option for your situation.
What Is Private Lending?
Private lending is when you borrow money from an individual or group of investors instead of a bank. The private lender sets their own terms, which can be more flexible than traditional lenders.
Private lenders look at more than just your credit score. They might look at your investing experience, as well as the potential of the property, and the details of the deal.
Different lenders charge different interest rates, but they’re typically somewhere in the middle between what banks and hard money lenders charge. You might also have more room to negotiate the loan terms, which can be helpful if you need custom financing.
What Are Hard Money Loans?
Hard money loans come from specialized lenders who focus on real estate. These loans are based on the value of the property and not your financial history, and because of this, they’re usually quick to be approved (often in days).
With these loans, you should expect to pay higher interest rates, and the repayment terms are typically shorter. Most hard money loans need to be paid back within as little as six months to a few years.
Because of the lack of focus on borrowers’ financial history, hard money lenders are taking on more risk than traditional lenders, so they charge more for the convenience. Hard money loans are good for fix-and-flip projects or when you need fast access to funding for a short-term investment.
Key Differences Between The Two
Let’s take a look at the main differences between private lending and hard money loans.
Loan Approval Process
Private lenders might ask you to provide detailed financial records and a solid business plan, while hard money lenders primarily look at the value of the property you’re buying and the potential return. If you need funding fast, hard money loans often move quicker.
Loan Terms
The terms for private lending can vary widely from one lender to the next. Some lenders might offer loans that stretch out for years and have flexible repayment options, while hard money loans are usually always shorter-term with higher monthly payments.
Interest Rates
Finally, private lenders might offer you competitive rates depending on your creditworthiness and relationship with them (if any). Comparatively, hard money loans usually have higher interest rates because they’re riskier and have shorter repayment terms.
Which Option Works Best?
There’s no right or wrong loan option for everyone, but certain circumstances may be better suited to a certain solution.
Private lending is a good fit if you want a longer repayment term, with lower interest rates and a more personal approach. But if you need access to fast funding and you don’t qualify for a traditional loan, hard money loans are a great choice.
