If you’re looking to get a loan but traditional means have rejected you, there are alternative options. You can purchase and invest in larger items, like a home or vehicle, without an impressive credit history or other typical requirements for loan approvals. These alternate choices are hard money and private money loans. Our team at Titan Funding wants to help you understand hard money versus private money loans by defining each, the advantages and disadvantages, and the considerations for choosing the right one.

What Are Hard Money Loans?

Hard money loans are short-term, asset-based financing options where the money doesn’t come from a traditional lender. This money comes from individual people or private lending companies. The companies or individuals accept assets or properties as collateral. Often, borrowers seek this loan for commercial or investment properties. In some cases, borrowers may choose a hard money loan if a traditional lender, like a bank, denies their mortgage application. Or, people can choose hard money if they forego a lengthy application required for loan approval.

Hard money is still a secured loan, like a traditional loan, but the term hard refers to the assets and properties you’re using as collateral to back up your value. This means if you can’t pay your loan, the person or private lending company can take ownership of your assets to regain its losses.

Unlike a traditional loan, you can get a hard money loan faster and without a cumbersome application process, making hard money ideal if you want to purchase something quickly. You can close on a property within a few days compared to a mortgage process, which can take about a month.

The Pros and Cons of Hard Money Loans

Like anything, there are advantages and disadvantages to hard money loans. Hard money loans are an accessible option for individuals who need money quickly or may not have the best credit score. Typically, private lending companies don’t have the uniform requirements as traditional lenders have to grant pre-approval.

While these loans are convenient for swift purchasing processes, you lose your assets or properties if you can’t pay your loan. Other disadvantages you may experience with hard money loans are potentially higher interest rates and a shorter term. For example, a traditional loan may allow between 15 and 30 years to pay off your mortgage, but with a hard money loan, you may have to pay it back in one to three years.

What Are Private Money Loans?

Private money loans are loans from private individuals or organizations, and these lenders can determine their criteria for who they feel comfortable giving the money. Often, the lenders can include friends and family members. Angel investors are also an option for private money loans. An angel investor lends a borrower money for a business they believe in, and the angel investor can have perimeters for the money like convertible debt or ownership equity. With these loans, you may enjoy more personal and flexible terms compared to traditional or hard money loans.

Pros and Cons of Private Money Loans

The benefits of private money loans can include getting fast approval with more flexible terms. As mentioned before, traditional loans can take a month to close and hard money loans can take a few days, but with private money loans, you may get it within the day you asked. Additional advantages of this loan include not needing a minimum credit score or a certain debt-to-income ratio to get approval. The private lender can set their own terms, which might be as simple as being your family member or family friend. This loan also allows for rehab financing.

Some drawbacks of private loans include high-interest payments and other fees and a shorter time to pay back the loan compared to a traditional loan. Additionally, consider your relationship with the person you’re thinking about taking a loan from because it may affect your relationship negatively, especially if it’s a friend or family member. If you want a private money loan but without the risk of sacrificing a personal relationship, network with others to find private organizations or professional individuals you don’t have a connection with to ask for a loan.

How To Decide Which Loan Is Right for You

Hard and private money loans can sound similar to each other as they’re both asset-based and may focus less on your credit score, but there are differences, and one might be more right for you than the other. One way they’re different is that hard money might be easier to find with a company than a private loan. It might take more networking to find a company with private loans. While both offer some flexibility over traditional loans, there might be more criteria for hard money than private loans.

Considering what you want to do with a property can help determine which loan is right for you. As an example, you may choose a hard money loan if you’re looking to flip a house or purchase an investment or a commercial property. Another way is by doing the math. If you’re looking to invest in a big-ticket item, like a home or car, getting one of these loans can be a quick process and great for low credit history, but the high-interest rates and payback time can be difficult if you’re unable to afford it.

Additionally, finding the right lender who will work with you and your needs is essential. Communicating your budget and finances is crucial when speaking with various organizations or individuals because it helps them understand your background and goals and reduces misunderstandings during the payback period.

We know there’s a lot of information about various loans and deciding which one is right for you and your financial goals, so this is just the basics in understanding hard money versus private money loans. If you have questions about loans, contact us. Our expert private money lending professionals can help provide you with the resources you need.