Usually, people have different definitions for private loan, bank loan, hard money loan, etc. Today, we are going to explain the major differences between private hard money loans and bank loans.
Funding: Hard money loans can be funded by either one private investor, many investors, or a pool of funds they manage. However, bank loans can only be funded with bank money, or the 3rd party institutions.
Credit scores: It is considered but not the primary factor in hard money loan. Each investor has his own criteria for credit scores. Instead of giving weight on credit score, hard money lenders prefer to take look more at the collateral and borrower ability to pay. In case of bank loans, credit score is the primary factor to make decision for loan approval.
Difficulty: Hard money loans are faster & flexible compare to bank loans as lenders typically customize programs to fit borrower’s needs based on the loan as well as collateral criteria. Banks have to follow all listed guidelines which are sometimes set by government agencies, so it is hard timeline to get funded.
Income: In the case of hard money loans, borrower’s income is of lesser concern, business bank statement can be used also for a repayment source. For bank loans borrower must to have good credit with documented income and usually they preferred W2 income most.
Interest rates: Private hard money lenders’ rates are usually higher than the bank loan rates. It typically starts at 12% and goes up based on unique criteria of each loan, and investors vary greatly.
Closing costs: Depending upon the loan amount they are varied and can be as much as 3-10 pts. For bank loans the closing costs usually 2-5% of the total loan amount.
Underwriting: Usually, banks are dealing with Automated Underwriting Software decisions. The final decision is typically NOT made by a bank employee. However, in case of private hard money lenders, it is based on the experiences of the private money lender in relation to the type of loan collateral offered.
So, these are basic differences between private hard money and bank loans. So, to choose either platform is totally depend on your current credit score and borrower criteria and the timeline on which you need it to get funded. Both are good in their own ways and their own instances. We can say that when there is emergency for funding, you don’t have good enough credit score and you need the funds for short time… then a private lender platform is the right place for you.