When people talk about hard money, they are usually referring to loans that are secured by a hard asset, such as real estate or equipment. These loans are considered "hard" because they are based on the value of the asset, rather than the borrower's credit score or financial history.
Hard money loans are typically used by real estate investors who need quick access to funding for their projects. Since these loans are secured by the property itself, lenders are more willing to provide funding, even if the borrower has a poor credit history or has been turned down for traditional financing.
So why is it called "hard" money? There are a few theories. At that time, lenders were required to maintain a certain level of reserves to ensure that they could cover any losses from defaulting borrowers. The term "hard money" may have referred to the fact that these reserves had to be held in cash or other hard assets, rather than in more speculative investments.
Another theory is that the term comes from the fact that hard money loans are often more difficult to obtain than traditional loans. Since these loans are based on the value of the asset, lenders will typically require a higher down payment or equity stake than they would for a traditional loan. Additionally, hard money lenders may charge higher interest rates and fees to compensate for the increased risk of lending to a borrower with a poor credit history.
The terms of hard money loans can vary widely depending on the lender and the specific loan agreement. However, there are a few key features that are typical of most hard money loans:
High-interest rates: Hard money lenders typically charge higher interest rates than traditional lenders. This is because they are taking on a higher level of risk by lending to borrowers with poor credit or limited financial history.
Short loan terms: Hard money loans are usually shorter than traditional loans, with terms ranging from a few months to a few years. This is because the lender is typically looking for a quick return on their investment, rather than a long-term relationship with the borrower.
Secured by a hard asset: As mentioned earlier, hard money loans are typically secured by a hard asset, such as real estate or equipment. This means that if the borrower defaults on the loan, the lender can seize the asset to recoup their losses.
Higher fees: In addition to higher interest rates, hard money lenders may also charge additional fees, such as loan origination fees or prepayment penalties. Borrowers should carefully review the loan agreement to understand all of the fees associated with the loan.
Lower loan-to-value ratios: Hard money lenders will typically require a higher down payment or equity stake than traditional lenders. This means that the loan-to-value ratio (the amount of the loan compared to the value of the asset) will be lower for hard money loans.
In conclusion, hard money loans are a type of financing that is based on the value of a hard asset, such as real estate or equipment. These loans are typically used by real estate investors who need quick access to funding for their projects and are often more expensive than traditional loans due to the higher interest rates and fees. While the terms of hard money loans can vary widely depending on the lender and the specific loan agreement, borrowers should carefully review the terms and understand all of the costs associated with the loan before agreeing to the terms.