How Are Traditional and Hard Money Lending Different

How Are Traditional and Hard Money Lending Different?

Banks and credit unions are not the only organizations capable of lending money. Private lenders, peer-to-peer (P2P) lending platforms, and even individuals willing to lend out their own money are all in play. One of the more popular non-traditional lenders is the hard money lender.

Traditional and hard money lending make up the bulk of the lending that occurs within commercial markets. Yet they are drastically different in many ways. Needless to say that some projects are better served by traditional financing while others do better with hard money.

So what makes traditional and hard money lending different? Here are the key differences:

1: Loan Security

Traditional financing is secured by the full faith and credit of the borrower. Lenders look at a borrower’s income, credit history, assets, debts, etc. before rendering a decision. In short, a borrower needs to prove credit worthiness in order to get a traditional loan.

Hard money is secured by an asset. In the majority of cases, that asset is real estate. Approval decisions are based primarily on the value of the asset compared to the amount of money being requested. Hard money lenders do not look at borrower income, credit history, and so forth.

2: Loan Purpose

Traditional financing can be used to cover a long list of commercial needs. Borrowers fund everything from business expansion to debt restructuring to capital improvements. Lenders have the freedom to loan for whatever purpose they see fit.

Hard money lenders have that same freedom. However, practically speaking, the vast majority of all hard money loans cover real estate acquisitions. According to Salt Lake City’s Actium Partners, commercial real estate transactions tend to be too risky for banks. Hard money lenders are more willing to fund such acquisitions based on property value.

3: Interest Rates

Interest rates on traditional loans are in line with the common practice of taking the prime lending rate and adding a percentage point or two. Interest rates tend to be pretty consistent among traditional lenders across the board.

Hard money lenders have more flexibility in determining their interest rates. On average, they tend to charge several percentage points more than traditional lenders. They do so in order to better manage the higher risk hard money loans are known for.

4: Loan Terms

The terms on traditional loans tend to be longer. You are looking at terms of anywhere between 7 and 30 years depending on the lender and the project being funded. It is nearly impossible to get such terms on a hard money loan.

Actium Partners says that a typical hard money loan as a term of 6-24 months. Most hard money lenders are extremely reluctant to go longer than 36 months. The shorter the better for both parties.

5: Funding Speed

Finally, funding speed is a big advantage for hard money. Because hard money lenders do not have to look into a borrower’s full faith and credit, they can approve, close, and fund as quickly as they can appraise the asset and write up the paperwork. A couple of days is not unheard of. In fact, this is the average.

Traditional lenders take a lot longer. It could take weeks to get approval and months to close. When time is of the essence, borrowers may not be able to wait on traditional lenders.

The differences between traditional and hard money lending are pretty stark. Both types of lending have a place in commercial markets. To say that one is superior to the other is to not understand how commercial lending actually works.

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