Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly—most hard money loans are for one to three years—and some of the other advantages they offer. Hard money lending can be viewed as an investment. There are many who have used this as a business model and actively practice it.
The cost of a hard money loan to the borrower is typically higher than financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital , a less stringent approval process, and potential flexibility in the repayment schedule. Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property.
Since it can be issued quickly, a hard money loan can be used as a way to stave off foreclosure. There are pros and cons to hard money loans related to the approval process, loan-to-value LTV ratios, and interest rates. One advantage to a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other traditional loan through a bank.
The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant's financial position. Lenders spend less time combing through a loan application verifying income and reviewing financial documents, for example.
If the borrower has an existing relationship with the lender, the process will be even smoother. Hard loan investors aren't as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults. Also, the interest rates tend to be high. For hard money loans, the rates can be even higher than those of subprime loans.
As of , the average interest rate for a hard money loan is Another drawback is that hard loan lenders might elect to not provide financing for an owner-occupied residence because of regulatory oversight and compliance rules. Real Estate Investing. Home Equity. Loan Basics. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
The distinction between "hard" metal coins and "soft" paper money was borne by the fact that metallic coins are solid, physical tokens with intrinsic economic value independent of their monetary status. Meanwhile, paper fiat currency only represents a promise to pay the bearer in physical money upon redemption.
In the absence of metallic monies, hard money today often refers to other types of monetary instruments that, to some extent, behave more like metallic money in domestic and international markets.
Examples include gold bullion or cryptocurrencies such as bitcoin. Hard money maintains a stable market value relative to real goods and services and a strong exchange rate relative to foreign currencies. Due to its value and stability in goods markets and financial markets, hard money fulfills the economic function of money as a medium of exchange , a store of value , and a unit of account better than softer monies that have more volatile value.
Essentially, the use of hard money involves lower transaction costs and risks than using soft money. This distinction originated when comparing the metallic content and confidence in the metallic standard of commodity money and eventually carried over to the comparison of various modern paper or fiat monies. Because the value of paper currencies tend to fluctuate on the forex market , according to confidence in the promises of payment that they represent, and decline in value over time as issuers inflate their supply, "hard" versus "soft" money also became associated with the relative stability of exchange rates of certain national currencies.
Hard money thus has a more stable value over time relative to real goods and services and a strong exchange rate relative to softer money. Regardless of whether a currency is backed by commodities or not, money is only useful in exchange and as a store of value if it is a socially accepted unit of account with which to measure value.
Users of money historically have tended to prefer to hold harder money because its more stable value makes it more useful in its functions as a medium of exchange, a store of value, and a unit of account for profit-and-loss accounting in business.
This tendency is part of the origin of Gresham's Law the other part being legal tender laws. Volatile fluctuations in the value of a currency or the steady erosion of value over time make softer money less useful for these functions. As governments around the world gradually dropped the use and legal tender status of precious metal money and precious metal backing, such as the gold standard , for paper currency, it was this relationship that stuck when comparing hard versus soft paper currencies.
Hard money, as it is used today, usually describes fiat money whose issuer shows restraint in the volume of currency they supply and whose government is relatively stable politically and responsible fiscally. Such currencies tend to lose value more slowly over time through inflation and maintain a more stable exchange rate compared to the currencies of similar, hard money currencies. Maintaining a hard currency policy is a major goal of monetary and fiscal authorities in some highly developed nations, such as Switzerland, and hard money is often highly desired on the international market because its stability and reliability make it more useful in the settlement of international trade and as a bank reserve.
Those who adhere to the Austrian theory of economics , such as Libertarians, view the re-establishment of hard money as a critical piece of gaining economic stability. Hard money is also a term used in a number of other contexts in finance. All of these are related to the original economic distinction between hard and soft money in that they indicate the degree of confidence or reliability that the involved parties can place on certain funds. In politics, the term hard money means money donated directly to a politician or a political action committee.
Hard money contributions carry some limitations and regulations, including how much you can contribute and the use of the funds. Soft money in this sense is a less reliable way for a donor to support a specific candidate because the party may redirect funds to candidates of their choosing. Hard and soft money can also refer to how clients pay their brokers or financial services providers. In this case, hard money refers to direct payments for services rendered—brokerage commissions—while soft money refers to payments for indirect items, such as the settlement of a costly error by providing free research.
Soft money arrangements in the financial industry are common but are not usually disclosed to stakeholders and regulators. A hard money loan is one that is backed by the value of a physical asset, such as a car or home. The collateral for the loan means that this hard money loan has a more reliable value than an unbacked loan. Loans of this type typically have a higher interest rate than what the borrower might receive through a traditional mortgage lender or other established financing channel.
Private investors or individuals most often issue a hard money loan as lenders of last resort due to timing or perhaps the distressed financial situation of the borrower.
Hard money is a term sometimes used to describe an ongoing funding stream originating from a government agency or other organization. The flow of funds represents a reliable series of payments, rather than a one-time grant. The closing costs on your investments are likely to be more with a hard money transaction as well. Another downside to consider is the shortened repayment period.
Hard money loans are often contingent on a quick return on investment for the lender. This means they rarely exceed 24 months and, in many cases, are required to be repaid in eight to 12 months.
Hard money lenders typically charge fees to the borrower for providing the loan. Interest rates on a hard money loan can vary greatly depending on the lender and the deal.
I've found most lenders will provide loans with a fixed interest rate; however, in some cases, you might be able to negotiate a floating rate.
Hard money loans are supplied by private individuals and companies, so the loan requirements can vary greatly between lenders. However, since the borrower often deals closely with, or directly with, the lender, there's often much more room to negotiate terms.
Hard money loans can be an excellent way to secure a real estate investment. Compared to a conventional loan, the interest rates are higher, but the higher rate is offset by the fact that the borrower can access the funds much faster and the loan is based primarily on the asset being purchased rather than the borrower's personal approval or credit.
When looking for a hard money lender, ensure you find a reputable company with a long and trustworthy track record in the industry. The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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