Hard money and private money are very similar, but not identical. There are major differences between two that borrowers need to know before working with a hard money lender to get a loan.
In this post, I’ll lay out the differences between hard money and private money, and help you determine which loan is right for you. I will:
Let’s get started with this post:
What Is Hard Money?
A hard money loan is a loan you receive as collateral for a tangible asset—usually real estate, but the asset can also be something else of value, such as gold, silver, or a motor vehicle. If you’re unable to repay the loan, the hard money lender can take ownership of the assets you used as collateral.
Because it’s not a conventional loan, you and your hard money lender aren’t confined to the guidelines created by Fannie Mae and Freddie Mac, so you have more flexibility in terms of your loan. While terms vary case by case, hard money loans are almost always short-term months, usually for the duration of 3 - 36 months.
While hard money lenders aren’t confined to the same regulations as traditional mortgage lenders and banks, many still have loan requirements. Some may just need to know what amount you need and what asset(s) you’re offering as collateral. Others may have lengthier application requirements, including:
What Is Private Money?
While a hard money loan requires fewer regulations than a traditional loan, private money requires you to jump through even fewer hoops.
A private money loan is just that: a loan given to you by someone to purchase an asset, like property or car, or for investment purposes. Private lenders aren’t even necessarily institutions—they can be a friend, family member, or an angel investor. Pretty much anyone with extra capital and an interest in what you’re doing can become a private lender. As such, the terms for your loan can be even more flexible than with a hard money lender.
Often, private money lenders have just as much interest in working with you as you do with them. They’re providing you with the capital you need to do something, like flip a house. When you do, they’ll make a return that you’ve agreed upon.
In this case, your profit would be:
Property sold price - cost of renovations - cost of loan interest - original purchase price
For example, if you bought a home for $150,000, spent $20,000 in renovations, $5,000 in loan interest, and sold it for $225,000, your profit would be:
$225,000 - $20,000 - $5,000 - $150,000 = $50,000
Meanwhile, your private money lender would make $5,000 on the deal without doing anything more than lending you money. It’s a win-win!
Key Differences Between Hard Money And Private Money
Hard money loans and private money loans have a lot of overlap, so here are some key differences between them.
Conventional loans have far more restrictions than hard money. However, private money lenders can have even fewer, which could potentially put both you and your lender in hot water if you’re new to lending and something goes awry.
Both hard money and private money loans are short-term loans. While interest rates vary, hard money loans averaged between 11% - 13% in 2020. They can be more or less, depending on the lending institution and other conditions of your loan.
Private loans can be even shorter than a hard money loan, or require even a higher interest payment. The loan is agreed upon by you and your private lender, so the terms vary wildly, as long as they remain within the confines of the law.
Traditional loans can take months or more before getting approved. That’s because conventional lenders go through an extensive process to ensure that all the proverbial T’s are cross and the I’s dotted.
Depending on a lender’s application requirements, hard money loans can be approved in a matter of days, and almost always in a shorter time period than a traditional loan. Hard money lenders have fewer regulations to meet, and therefore less that’s required of them.
Private lenders can theoretically lend you money instantaneously. Once you sign an agreement, they can transfer your money then and there.
This is where things get particularly tricky. Hard money lenders can and frequently refer to themselves as private lenders, if they’re also defined as non-institutional. One of the key differentiators between hard money lenders and private lenders is their approach:
Who Are Hard Money Lenders And Private Lenders?
Taking into account those above definitions, here are a few examples of each type of lender.
The first two examples are easy to define as either a hard money lender or a private lender. The last two blur the lines a little, hence why these terms are often used interchangeably.
Hard Money: Pros And Cons
Here are the pros and cons of hard money:
Private Money: Pros And Cons
Here are the pros and cons of private money:
Hard Money vs Private Money: Which Is Best For You?
As you may have already guessed, there’s no clear-cut answer. It all depends on your situation and who you know. If you have an amazing working relationship with a real estate agent who is funding your house flipping or investment properties, then using them as a private lender is probably your best option. If you’d prefer to work with an institution so that you don’t risk damaging a close relationship, then a hard money lender may be a better fit for you.
You could also try a bridge loan or a fix and flip loan. In whatever you choose, I recommend doing your research and weighing your options before jumping into any decision. Also, have a clear plan to pay off the loan you take out before making any deals involving assets or loved ones.Interested in learning more about hard money loans? Check out our posts about hard money loan requirements or discover who the best hard money lenders are in Florida, Virginia, or Washington D.C.