Hard Money: Why Investors Accept Higher Interest Rates
One of the most often heard criticisms of hard money is that borrowers are forced to accept higher interest rates compared to more traditional loans. As the thinking goes, paying such high rates isn’t worth it. But lots of investors would vehemently disagree. They are willing to pay higher interest rates in exchange for the advantages hard money offers.
Investors and businesses make up the lion’s share of hard money borrowers. This is important to understand if you want to know why they are willing to accept interest rates that can be significantly higher than the rates on conventional loans. In exchange for paying higher interest rates, borrowers get:
- quick funding
- minimal documentation requirements
- shorter loan terms
- more lender flexibility.
Let us look at each of these four things more closely. By the time you reach the end of this article, you should have a better understanding of why hard money is so attractive.
1. Quick Funding
Banks are required to leave no stone unturned when assessing a borrower’s credit worthiness. That, combined with a complex underwriting system, means applicants can wait weeks for funding. In some cases, they wait months.
Hard money lenders employ a much simpler process. They do not have to adhere to the same requirements as banks, so their process is much faster. Consider Salt Lake City’s Actium Partners. They have been known to fund hard money loans in as little as 24 hours.
2. Documentation Requirements
Hard money lenders can move more quickly because their documentation requirements are minimal. Unlike banks, hard money lenders do not need tax records or income statements. They do not need to see a company’s P&L statements. They do not even have to run credit checks.
Banks need to review all sorts of documents because their lending rules and policies dictate as much. Unfortunately, it’s easy for a bank to get bogged down in the paperwork.
3. Shorter Loan Terms
This next benefit of hard money, shorter loan terms, may seem contradictory. But that’s only because most of us think in terms of extending our loans for as long as possible to keep monthly payments lower. Hard money borrowers usually don’t think that way.
The shorter terms hard money offers give borrowers the opportunity to quickly pay what they owe so that they can devote their capital to other things. Shorter terms are especially attractive to investors who hate to tie up their cash in extended loans. They prefer to get in and out quickly, then move on to the next project.
4. Lender Flexibility
Hard money lenders are private lenders not bound by the same rules, regulations, and standards that apply to conventional banking. They also don’t tend to have strict underwriting policies.
Go to a bank for a business loan and you are likely to discover that you only have access to a limited number of loan programs governed by strict guidelines. As private lenders, they can structure loans in any way they see fit.
This allows private money lenders to fund projects banks wouldn’t touch. It allows them to take on projects that are attractive to conventional lenders. They can work with borrowers to craft loans tailored to their unique needs.
Loan interest is more or less a fee you pay for the service of borrowing money. Like any other service, paying a little more tends to get you more. That’s certainly the case with hard money. Borrowers are willing to accept higher interest rates because they get a lot more in return.