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The Difference Between Hard Money Loans and Private Money Loans

To survive in today’s tough economy, business owners and real estate investors often turn to non-traditional lenders to secure financing for operating expenses or property purchases. Non-traditional lenders have emerged as an excellent option for many because they offer loans with fewer restrictions and more generous lending terms than traditional lending institutions such as bank and mortgage brokers. However, many investors and business owners find themselves confused by the difference between hard money and private money lenders.

What’s the Difference Between Hard Money and Private Money?

Both kinds of money loans provide timely financing for investors and business owners with a wide variety of financing needs. However, there are important differences between these two types of loans. Understanding how these types of loans differ is key to picking the financial product that will best meet your needs.

Basics of Hard Money Lending

Hard money loans are offered by businesses that specialize in alternative lending. While the funding for these kinds of loans often comes from private sources, the lenders are regulated and specialize in working with real estate investors, private borrowers and business owners. Like private money lenders, hard money lenders focus on borrower equity instead of credit scores to make lending decisions.
However, hard money lenders generally have set approval criteria and loan terms. They work with borrowers who can’t find financing elsewhere, but they don’t negotiate extensively about how loans will be repaid. Instead, they rely upon industry-standard formulas to determine interest rates and repayment plans that allow profit while also providing fair terms for borrowers.

Basics of Private Money Lending

As their name suggests, private money loans are offered by completely private lenders. They generally do not operate as businesses and often do not advertise that they have funds available to be lent. Most private money lenders are also unregulated and don’t have to conform to lending industry regulations regarding loan rates or terms.

Approval criteria for loans can also vary widely between private money lenders. Because there are no set, standardized criteria, borrowers often have little idea whether or not they’ll be able to access private money funds. Securing these types of loans tends to require heavy negotiation regarding interest rates and repayment plans.

Should You Choose Hard Money or Private Money Loans?

Choosing between the two may be difficult, but many borrowers find that hard money loans are much more beneficial because they are offered by regulated businesses. Borrowers can review the criteria of individual lenders before turning in their applications so that they have a decent idea of whether or not they’ll be approved for financing. These loans also offer fair, industry-standard terms that benefit borrowers.
Remember that there are different types of hard money loans available:

  • Gap loans help business owners meet deficiencies between their available funds and business expenses.
  • Fix-and-flip loans help borrowers who want to buy distressed properties to rehab them and sell them at a profit.
  • Commercial rehab loans help those who want to buy and repair distressed commercial properties.

Financing a Garage Door With a Hard Money Loan

An automatic garage door is a must for any modern home. If you don’t have a door that automatically opens, the only alternative is manually opening your garage door every time you want to store your car. Or else you have to park you car on the street, thus leaving it vulnerable to the elements and possibly even theft. But if you want to install a new garage door, or even simply replace the system that you already have, it can sometimes be difficult to get the money you need, particularly if there are a few negative marks on your credit. But so long as you own your home, you probably won’t have much trouble getting financing if you seek out a hard money loan.

A private money loan functions a lot differently from a lot of bank loans, mostly because they are asset based. This means that they are based upon your current assets, and therefore rely less heavily on your credit report. Private party lenders are able to do this because they are not obligated to adhere to the kind of underwriting guidelines that can make the approval process for a bank loan more frustrating.

If you are considering purchasing a garage door with the help of hard money loans, keep these tips in mind.

Choose Your Style – The two main kinds of garage doors that you can purchase with a hard money loan are tilt up and sectional. Tilt up garage doors are composed of a single, large door that tilts up and down to open. These models can be seen on a lot of older homes, and are generally one of the cheaper options. Sectional garage doors work by rolling up vertically, and being stored near the ceiling when the door is open. This option is a bit costlier, but it might be more attractive if you want to limit the amount of space that your garage door takes up.

Choose Your Material – The two most popular materials for a garage door are aluminum and wood. Aluminum is a popular choice because it is lightweight, very resistant to rust, and relatively inexpensive, so it allows you save a lot of your hard money loan. If you want something that might be a little more aesthetically pleasing, you might go for a wood garage door instead. When purchasing a wood garage door, make sure that it comes with a good finish so that it can stand up to harsh weather.

Focus on Safety – In 1993, the Consumer Product Safety Commission Mandated that all automatic garage doors come equipped with what is called an “external entrapment protection system.” This is simply a motion sensor device at the bottom of the garage door that prevents anything or anyone getting trapped underneath the door. These vary in quality, so make sure that you spend a little more of your hard money loan to ensure that you don’t have to deal with a constantly malfunction entrapment system.

Maintain Your Investment – After installing your garage door with the help of a private money loan, you should make sure to maintain it properly so that it will maintain its usefulness for years to come. One of the most common issues with an automatic garage door is falling out of adjustment. This might cause the door to rise very slowly, or even lock up completely. To prevent this, it’s best to inspect the hinges occasionally. If they appear loose, tighten them up. Once a year you should also re-lubricate the joints. By keeping the moving parts well oiled, you cut down on friction and help ensure proper operation of your garage door.

Commercial Hard Money Loans – Your Absolute Last Resort To Finance Commercial Real Estate

You should consider getting a commercial hard money loan only after you have reached the conclusion that you absolutely will not qualify for a conventional commercial real estate loan. The decision, although tough for most commercial funding recipients, is pretty easy. Either let go of your commercial real estate or accept the terms provided by your commercial hard money lender.

Commercial hard money lenders are essentially your last resort to finance commercial real estate. You are receiving one thing that’s extremely useful in exchange for the relatively high cost of a commercial hard money loan. That extremely useful thing is time. Time for repairs, time for restoration or whatever the difficulties that you’ve gotta surmount are. Whether it is taking your business back to profitability, reducing your debt, time to continue leasing out your commercial real estate, or to restore your own personal credit. We’ve seen so many borrowers end up letting their egos get in the way and turning this event into something it’s really not.

The truth is that, it’s basically an act of courage since you are actually facing the issues you confront head-on and dealing with everything at once, so you are eventually able to to resolve it. And no matter how bad it really is, you can take some pride in that. A whole lot of people today have a tendency to hide from reality and let their problems overwhelm them.

Remember the old saying: “comparing apples to apples”? You simply can’t compare commercial hard money loans to traditional bank financing, which you may have been eligible for 3 or so years ago. However, these days, you’ve really gotta be realistic and compare your intended financing to your existing alternatives. Here’s what your choices are: 1) Team up with a business partner. 2) Relinquish your entire business. 3) Lose your commercial real estate to foreclosure or other mishaps.

Let’s say you own a commercial property that’s worth $2,000,000 and you owe $500,000 on it. So, you’ve got $1,500,000 in equity that you could possibly lose versus paying for high-priced commercial hard money loan. Or say you take on an incompatible business partner who just because you’re pressed for time and need the money. Now, you have at risk whatever equity you’ve got in the property, and then you create further legal difficulties by needing to dissolve your business relationship with that business partner. And if things eventually work out with your business partner, you may even need to trade off a lot more with your business partner than you would otherwise spend in fees to the lender.

Most commercial hard money lenders charge you 6% on the front-end of loans, which is clearly pretty darned expensive. When you’re dealing with terms like that and you want an additional $500,000 to bring the total loan balance to $1,000,000. You’d have to pay $60,000 in fees–in comparison with losing $1,500,000. It is pretty difficult, yet straightforward. So, please don’t let your ego get in the way of your commercial real estate financing decisions. Just face your issues head on, and deal with them one by one.