What is the Difference Between Hard Money and Private Money Loans?

If you are looking into financing options for a real estate investment, two terms you may frequently hear mentioned right alongside each other are “hard money loans” and “private money loans.” In fact, you may even hear these terms used interchangeably. What are these types of loans, and how do you choose which is right for you?

Hard Money Loans

Let’s start with hard money loans. These are offered by banks, mortgage brokers and other financial institutions, and are secured by collateral. These loans:

  • Are intended for short-term use.
  • Do not require ideal credit.
  • Are fast and simple to apply for.
  • Feature rapid approval.
  • Usually have higher interest rates than regular loans.

Because of their short-term nature and higher interest rates, you would probably not choose a hard money loan for decades of financing on a property. Ideally, you would use a hard money loan for a purpose such as fix and flip or bridge financing.

Private Money Loans

Unlike a hard money loan, a private money loan is typically offered by an individual rather than a bank. Note that there are exceptions, however. Some companies use the phrase to refer to hard money lending products. Most of the time, private money loans:

  • Are funded by individuals. You could get a private money loan from a friend or family member, an associate, or any other private investor.
  • May carry short or long terms.
  • Do not require ideal credit.
  • May feature high or low interest rates.
  • Could have a formal or informal application process.

Flexible qualification—particularly where credit is concerned—is the main commonality between these two types of loans.

But whereas a hard money loan i s not suited for long-term needs, a private money loan may be. You also may maximize flexibility if you go this route, since you have the option of dealing with a friend or someone else who knows you well and has your interests at heart.

Keeping Financing Affordable and Convenient Starts With Choosing the Right Type of Loan

While hard money loans and private money loans are interchangeable at some institutions, these names usually refer to two distinct lending products.

In some situations, it may be obvious whether a hard money loan or private money loan is the most suitable option. In others, you might need to do some additional research or ask for professional advice. Either way, picking the most ideal type of loan for your needs should pay off in more way than one.

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