Hard money lending gets a bad rap among people who either do not understand it or just don’t like it. Critics sometimes make misleading claims, such as equating hard money lending with predatory lending. That is truly unfortunate. Hard money is a private lending option that works very well for certain kinds of borrowers. It is by no means predatory in nature.
Distinguishing between hard money and predatory lending starts with an explanation of the latter. Here is what the Investopedia website says about predatory lending, in part:
“Predatory lending includes any unscrupulous practices carried out by lenders to entice, induce, mislead, and assist borrowers toward taking out loans they are unable to pay back reasonably or must pay back at a cost that is extremely above the market rate. Predatory lenders take advantage of borrowers’ circumstances or lack of knowledge.”
Going through the Investopedia statement point-by-point should adequately demonstrate why hard money lenders are not predators. The first point relates to unscrupulous practices. Most of the disagreement that surrounds hard money lending has to do with rates and terms. There is nothing unscrupulous about a higher interest rate and shorter terms when they are compared against the risk hard money lenders take.
Hard money lenders do not offer auto loans. They do not tend to get into the residential mortgage market. Most hard money lenders write loans for very risky projects – like real estate development, for example. The higher the risk, the more lenders have to protect themselves via rates and terms.
Entice, Induce, Mislead
The next point is that predatory lenders use a variety of strategies to entice borrowers to take out loans they either cannot afford or that will cost them too much in the long run. Many of these practices are misleading. No disagreement there. However, hard money lenders do not typically operate this way.
Hard money loans are straightforward and simple. Lending terms are easy to understand. And because hard money lenders typically work with experienced investors, business owners, and executive management teams, they are dealing with people who are not easily fooled or enticed.
Taking Advantage of Circumstances
It is often said that hard money is last resort financing that takes advantage of a borrower’s negative circumstances. The implication is that people only go to hard money lenders after banks turn them down. That is true in a minority of cases, but the majority of hard money borrowers choose to go that route because hard money is more advantageous to them.
Take a real estate investor looking to acquire a retail complex. In a hot market, there may be three or four others looking at the same property. The investor could get bank financing, but it would take months to arrange. He doesn’t have that kind of time. Instead, he applies for a hard money loan that he knows he can get in about 48 hours.
Actium Partners, a hard money lending firm based in Salt Lake City, UT, says speed is one of the big advantages of hard money. Actium has been known to fund loans in as little as 24 hours. That is a big advantage in a competitive market where the party who arranges financing the quickest is often the winner.
There is no arguing that hard money is not conventional financing. It is quite unconventional. Unfortunately, its unconventional nature leads to misunderstanding. Misunderstanding leads to fear. They both lead to so much misinformation that encourages people to stay away from hard money. That’s too bad as hard money is sometimes the best option. Avoiding it out of fear or ignorance is throwing away an excellent financial resource.