What is a Private Money Lender
The private organisations or investors who are in the business of lending out money as a personal loan to someone who needs a financial support fall under the category of private money lenders. It could be a middle man company that brings you in contact with an investor or a firm that might loan you some money. Unlike the traditional money lending methods, private money lenders provide you with a real estate loan that is secured by a property and not by you. Whether it is a business start-up or for some other cause, the only way a private money lender is convinced to give you a loan is by being assured that your venture is profitable, and you will be able to return them the money with interest. This is the reason why private money lending is referred as a risky business. The private money lenders tend to know about opportunities and risks in a particular business segment, and they invest accordingly. While the bank may decline your loan if it does not find your idea unique enough, the private money lenders would give you credit if they see a scope of opportunity in your business. There are several benefits of relying on a private money lender for a loan like minor paperwork, readily available loan and the advantage of getting your work done in little time.
Advantages of a Private Money Lender
1. Your leverage increases at an exponential rate when you purchase a property with cash funds from the private lender.
2. With private money lending, both sides are equally benefitted. While one gets interested in their money, the other gets growth for their business.
3. The entire process of taking a loan from private money lenders takes very less time. All the transactions are held at a substantial speed and with efficiency.
4. You have the option of going for either the institutional private money lenders or the private hard money lenders.
5. The bank might not find you capable enough to meet out a large loan but with private money lenders, it is the property that matters and not your market value. Hence, getting a loan is easier. In other words, private lenders focus on property and not in the person.
Disadvantages of a Private Money Lender
1- The time limit for repaying a loan taken from private money lenders is usually quite short compared to the loan taken from a bank.
2. The interest rates that the private money lenders charge are very high (12% to 20% on an average)
3. There are no specific terms or lending criteria with private lenders. It depends on upon agreement between you and the lender.
4. There is no website or on-paper information available in case of private money lenders. You need to discuss and know their parameters only after having a meeting.
What is a Hard Money Lender
Hard money lenders can be said to be the individuals or companies who are professionally into the business of money lending and to stay in business they need to keep lending money. These Hard money lenders have a license from the National Mortgage Licensing System and the state regulatory authorities as well. There is a systematic approach for everything with the hard money lenders- right from filling an application form to paying several fees like originating fees and underwriting fees. There are two different types of hard money lenders- the ones who have investors providing them with funds for lending and the ones who loan out their funds to people. These money lenders can either loan out the money themselves or sell their loans to receive back greater profits.
Unlike the private money lenders, these money lenders usually have fixed criteria of going about things. Most of the hard money lenders have a website to guide you through what will be the interest rates, the term for which the money will be lent out, loan to value ratio and several other parameters that hold importance to the customers. The kind of loans that a hard money lender will consider and the documentation required for them vary from each money lender. To keep things sorted, they provide you with plenty of time to discuss about the parameters required to qualify for the loan. If you come up with a fair deal, they are likely to approve and provide you with the loan. The interest rate on their loan is decided after the lender has examined the details of the property for which the loan is meted out.
Advantages of Hard Money Lender
1-The hard money lenders have a systematic way of working as it is a business for them.
2. You have the advantage of looking up on their website and clearing all your doubts before you finally apply for the loan.
3. A hard money lender is barely interested in your credit score, and thus there is no discrimination when giving a loan.
4. With hard money lenders, although there are certain fees and charges involved, they are quite cheap as compared to the bank prices.
5. The higher the value of the real estate in your portfolio is, the better loan amount you can expect to get from a hard money lender.
Disadvantages of Hard Money Lenders
1-There is usually a lot of paperwork involved, and the entire process can be time taking with inspection of the property and other formalities to be completed.
2. The terms of lending money and different perimeters are different for different hard money lenders.
3. You ought to be careful to work only with a licensed hard money lender as there are several fraud cases of non-licensed lenders masquerading as approved hard money lender.
Different Types of Hard Money Lenders
Hard money is not only limited to asset-based financing. There are several other situations like the occurrence of foreclosure proceedings and bankruptcy or arrears on the existing mortgage, which qualify for a hard money loan. However, not all types hard money lenders are open to such loans. The few main types of hard money lenders you might come across are:
Commercial banks qualify as hard money lenders since the principle of their business is to lend out money and draw profits on it. However, to be qualified for getting a loan from these banks, you ought to own a traditional business as they only invest in risk-free businesses.
2. Mortgage Brokers
Mortgage brokers are the middlemen who have numerous hard money lenders in their contact. If you want to have various options to consider before choosing the best deal for your loan, mortgage brokers are the source you should opt for.
3. Online Lending Companies
There are numerous hard money lenders who operate their business online, and you can refer to them for a loan too. With online lending companies, you have the benefit of comparing different deals from different hard money lenders who operate online before finally settling down on the best option. Since each one of them has a different set of parameters like the term for which the money is being loaned and interest rates, you can take plenty of time and choose the one that suits your demands. You can simply look up for the hard money lenders in your area and check their websites which enlist all the details of their money lending terms.
4. Financing Companies
Financing companies work just like commercial banks except for the fact that unlike commercial banks, they tend to approve nearly all the loan proposals that come to them if the property papers submitted are legitimate. However, the interest rates of financial companies are a tad bit higher since they are the only hard money lenders who don't tend to determine loan depending on the risk factor.
Conclusion between Hard money vs Private Money
The fundamental difference between private money lenders and hard money lenders is that the hard money lenders tend to function more on the format of banks, the private money lenders don't follow any institutional criteria at all. The hard money lenders tend to focus entirely on the figures that speak their profit, like the interest, they will make, and they are not much concerned about the property. With the private money lenders, it is not about recapitalizing or trying to sell the papers. They make their investments depending on whether the property is worthy enough to rehab it or not. With private money lenders, it is a profitable deal for both, the borrower as well as the lender.
When it comes to the final paperwork and formalities, the private money lenders are easier to work with as the function of hard cash lenders usually, includes filling forms and inspection of the property. Thus, the simplest and fastest way to get cash as a loan is through private money lenders, even if it means higher interest rates and an unplanned way of working. With hard money lenders, there is the benefit of systematic working with everything being on paper, trusted and licensed money lenders and a longer term of the loan than the private money lenders. Hence, the final decision depends on entirely on what suits you as a borrower- higher interest rates and quickly accessible money or lower rates but duly time taking proceedings before you finally get the loan.