I noticed a trend beginning to emerge in the hard money industry during the COVID pandemic. Some hard money lenders began referring to themselves as private lenders. They also stopped referencing hard money and bridge loans. Instead, they talked about private loans. But here is the thing: hard money and private lending are not the same.
Hard money lenders are private lenders. There is no disputing that. But not all private lenders make hard money loans. Not all private lenders follow the same lending practices that are typical of hard money lending.
The two terms are often used interchangeably without too much trouble. That’s fine. As long as the lender and borrower both know what they’re getting into, what they call it doesn’t really matter. But for someone who doesn’t understand private lending, the distinction is important.
The Basics of Private Lending
The first thing to understand is that private lending is the domain of individuals and organizations not licensed as banks, credit unions, or financial services companies. Your cousin Ralph could be a private lender if he had the money to do so.
In the strictest sense, private lending refers to lending made available through individuals or private organizations not affiliated in any way, shape, or form with financial institutions. They are the most flexible of all because they are subject to the least amount of regulation. They have a lot of leeway in establishing loan terms and approval criteria.
Strict private lenders in some states do not even have to be licensed. They can be more flexible with interest rates and down payments. They can pretty much customize loans on a case-by-case basis.
The Basics of Hard Money
As previously stated, hard money lending is also private lending in the sense that lenders are not affiliated with financial institutions. However, one of the primary differences between hard money and true private lending is organization. Hard money lenders are almost always organized as licensed firms established to manage the funds of multiple investors who pool their financial resources in order to make loans.
Salt Lake City, Utah’s Actium Partners is a perfect example. Actium Partners is a licensed firm. The money they loan out comes from investors. It is Actium’s responsibility to protect the interests of their investors with every loan they make.
Another substantial difference with hard money is that lending is based on assets. According to Actium Partners, the vast majority of all hard money loans are utilized to fund real estate acquisitions. Real estate is an asset. In hard money lending, it is also collateral.
In the hard money industry, approval decisions are made based on asset value. An investor hoping to purchase a piece of property needs to demonstrate that the property has enough value to cover the amount being requested plus any additional expenses. The lender does not really care about the borrower’s credit score, credit history, income, etc.
Similar Use Cases
Despite being technically different, the use cases for both types of lending are similar. Where a hard money loan might act as a short-term financing tool to obtain property, a private loan could be a long term loan for the same purpose. Private lenders are also more open to opportunities above and beyond real estate investing.
Some hard money lenders are trying to soften hard money’s image by referring to themselves as private lenders. It is no big deal for most part. Hard money and private lending are similar. But when you get down to the nitty gritty details, they are not exactly the same thing.
