There is a recent trend among hard money lenders to stop referring to what they do as ‘hard money lending’. Instead, they want to be known as private lenders who engage in ‘private money lending’. Why the change? Because there are a lot of myths about hard money lending and how it got its name. Some of those myths have a negative connotation.
There really is no point in going through the myths here. They are what they are. Instead, it is better to discuss how hard money lending really got its name. It’s actually pretty simple. The word ‘hard’ refers to the assets that borrowers offer as collateral. Hard money lending gets its name from hard assets like property, business equipment, etc.
Secured vs. Unsecured Lending
All types of credit instruments can be divided into two categories: secured and unsecured. A secured credit instrument is any credit instrument with collateral backing it. Unsecured credit has no backing. If you use credit cards, you have personal experience with unsecured credit. You purchase on credit indiscriminately. You have no assets the lender can seize in the event you stop paying.
On the other hand, mortgages and car loans are secured credit instruments. They are secured by the respective assets they are used to obtain. Hard money is a form of secured lending. But assets are much more important to hard money lenders than banks and credit unions.
To a hard money lender, collateral must be a hard asset that can be liquefied quickly. Maybe it’s a piece of real estate that can be seized and sold within a short amount of time. Perhaps it’s business equipment for which there is a strong used market. Whatever collateral might be it needs to have high liquidity. Otherwise, hard money lenders will not touch it.
Commercial Real Estate Transactions
Actium Partners, a well-known hard money lender throughout the state of Utah, says that commercial real estate transactions make up the bulk of hard money lending scenarios. Let us use a typical real estate purchase to illustrate the hard asset concept.
Actium Partners funded the acquisition of a multi-unit apartment complex some time ago. Prior to approval, they sent a team member out to appraise the property. It turned out the property was worth more than what the borrower was asking. Approval was given and the loan funded.
Not only did the property have the value Actium needed to mitigate its risk, but it was also attractive enough that it could have been sold quickly had it been necessary. The combination of high value and high liquidity kept Actium’s risk to a minimum. They were happy to make the loan.
Collateral and LTVs
Another significant difference in hard money lending is that loan-to-value ratios tend to be higher compared to traditional lenders. It is not uncommon for a hard money lender to offer an LTV as low as 50%. They will lend half while the borrower puts down the other half.
What does this have to do with hard assets? The lower the LTV, the more attractive a high value property is. Lower LTVs mixed with high collateral value makes it even easier for lenders to approve loans.
Hard money lending gets its name from the hard assets borrowers put up as collateral. It is no more complicated than that. There is nothing nefarious about either the name or the practice that is hard money lending. It’s just another form of financing that approaches lending from a different angle. Now that you know, you can dismiss the myths you’ve heard in the past.