If you’re new to the financial industry, you may be asking yourself about the main difference between hard money versus traditional bank loans and how each can benefit you. Borrowers often think that traditional bank loans are the right paths to fulfill their business ventures. However, that may not be entirely true—hard money loans are good for specific situations. Let’s discuss the two loans and which one may be right for your business.
Traditional Bank Loans
As the most common ways to finance business and personal ventures, traditional loans are provided to borrowers from any-size bank or credit unions. Generally, the bank allows the borrow to pay back the loan incrementally over a specific period of time (usually anywhere between 1 and 25 years). The borrower must present income verification, proof of address, and their employer’s contact information to successfully receive a traditional loan. Additionally, one must have a minimum credit score of about 610. It’s important to remember that unless you have a high credit score of 700+, you may be required to accept a higher interest rate.
Hard Money Loans
Many people are wary of hard money loans simply because the name suggests dishonest practices. Although the entertainment industry often depicts this type of loan as an unsafe way of financing, it may something you can benefit from. A hard money loan is usually a short-term loan offered by an individual or private business rather than a traditional bank. What’s unique about this type of loan is that the borrower must provide an asset or property as collateral to support the loan’s value.
This loan offers the borrower money without demanding multiple documents, which can often be difficult to acquire or recover for the regular consumer. Hard money loans also offer shorter loan terms, with the repayment period lasting only a few years.
Real estate investors typically use hard money loans. These individuals benefit from this type of loan because time is of the essence in the real estate industry. They may need to quickly purchase a property for a fix and flip, a project for which a hard money loan would be ideal.
If you’re looking to get started in real estate, you may also utilize private real estate loans to fund your business venture.
What’s the Difference?
The main difference between these two loans essentially comes down to convenience and speed. Because hard money loans don’t require as much documentation as traditional loans, borrowers can expect to see their funding more easily. Furthermore, a hard money borrower doesn’t have to wait 30+ days to receive their loan amount, making it more advantageous for them to pursue timely business opportunities.
Hard money versus traditional bank loans and the main differences are critical to remember when you’re considering financial options in your career.