Two terms that you may come across in the financial arena are “hard money” and “private money”. These two are often confused, because they have so many similarities. This is because both loans are based on assets, and both are based on the assets that a borrower has, rather than their credit history. Furthermore, neither hard money nor private money comes from a bank or another type of national lender. However, for all their similarities, there is a difference between the two.
What Are Private Lenders?
First, let’s take a look at private lenders.
“Private lenders are just what their name suggests–private. They could be a friend, family member, business associate, or maybe just a professional referral. In any case, their role as a provider of funding is strictly as you agree upon with them.”
This essentially means that their primary business is not one of lending money. They may set certain terms to borrowing someone money, but these terms are not contractual and used across a range of different borrowers. They are set as and when required, usually through mutual agreement. For instance, someone who borrows of their parents will agree to pay it back within a certain period of time.
What Are Hard Lenders?
Then, there are hard lenders. Hard lenders are far more comparable to conventional lenders, in as such that they have interest rates, contracts and criteria for acceptance that a private lender generally doesn’t have. They tend to be a business of some description, even if that business is not primarily one of lending.
Why Do the Two Get Confused?
So why do the two get confused? The reason for this is because it is possible to be both a private and a hard lender. In fact, more often than not, a lender is both at the same time. Technically, if someone were to lend money of their parents (private money), yet sign a document that agrees the terms of repayment, which may even include some interest, these parents would become hard lenders, even if they are classed as private lenders. Indeed, most would agree that the terms are in effect interchangeable.
“Hard money and private money are basically interchangeable terms but in practical use, “private” typically implies a lower rate than “hard money.” Some hard money lenders are funds (groups of private lenders) and others are individual lenders. Both set their own rates, terms and types of property they’re willing to lend on.”
Essentially, both private and hard money lenders are lenders that are different from a bank. If that money is borrowed by having to follow a number of rules (be that payment terms, paying interest rates or having to meet certain criteria in order to actually access the money) would technically make it hard or private. However, what matters most is that both these forms of lending are generally more relaxed and far more affordable than lending from a bank or other more conventional financial institution, and this is why both types are becoming more and more popular.