Hard money loans are asset-based loans that are secured by real property. They are also called private money loans or bridge loans.
These short-term bridge loans are often considered “loans of last resort.”
Primarily used in real estate transactions, hard money loans are typically issued by private investors or companies and are considered an alternative when banks and credit unions are not viable options.
Due to the shorter duration of the loan and higher risk involved, private money loans carry a higher interest rate than conventional residential or commercial property loans.
History of Bridge Loans
First introduced in the late 1950s, bridge lenders started to capitalize on America’s changing credit industry.
During this period many Americans were facing difficulties obtaining any type of loan from the bank or government.
When hard money loans first came into existence the duration of the loan was always for shorter periods and the interests were as low as 3%. Over time as the popularity of hard money grew, the average term length and interest rate both increased.
Nowadays Americans can find hard money lenders that will lend from 6 months to 5 years and interest rates from 7% to 15%.
As hard money loans became more popular, lenders saw an increase in demand from both borrowers and capital investors helping to grow the industry.
Being directly correlated to real estate prices the hard money loan industry experienced a serve set back during the USA real estate crash of the 1980s and then again in the 1990s.
This was the result of lenders overestimating property values and being over leveraged.
After these setbacks lenders developed the concept of Loan-To-Value ratios to protect themselves against another market collapse.
Recent years have experienced major growth in the private capital market.
Today there are more hard money lenders due to the increase in demand for short term money to fund projects like Fix and Flips, 1031 Exchanges, and Cash-Outs to purchase additional properties.
4 Major Reasons Explaining the Growth of Private Money Loans
Asset-based Underwriting
The most important factor lenders look at is the underlying value of the collateral asset.
Unlike what happens with traditional bank loans, where the individual’s credit history, employment status and down payment are the most important factors.
Higher Returns on Investments
Funding hard money loans have caught the interest of many investors seeking higher returns than what they usually earn from more traditional investments like the stock market.
Mutually Beneficial to Lenders and Borrowers
Hard money loans are beneficial to both the lender and the borrower.
Lenders get rewarded from financing higher risk projects with higher returns on their investment.
On the other hand, borrowers have faster access to capital as compared to what conventional lenders offer.
There is also more flexibility in the terms of private money loans as they are negotiated directly between the borrower and the private lender and can be tweaked based on the scenario.
Credit Availability
It is very difficult for borrowers with a bad credit score to obtain funding through traditional means.
Hard money lenders look beyond your credit score. These loans have fewer guidelines, less red tape, and a faster process making them suitable for borrowers who need money quickly.
The Bottom Line
The increased popularity of hard money loans is valuable to both lenders and borrowers.
In today’s fast paced market a hard money loan can prove to be an invaluable resource to a seasoned investor who is looking to quickly capitalize on a great property or investment.
Look for these types of loans to continue to increase in popularity in the years to come.