Private Money vs. Hard Money: When You Need Funds Fast

As a real estate investor, you need reliable funding to seize deal opportunities. But what if you’ve exhausted all your traditional financing options? 

When considering private money vs hard money loans, both can be valuable resources for securing your next deal. But what’s the difference between the two or are they the same? 

Hard Money Loans Defined

A hard money loan gets its name from being backed by an asset. In real estate, this is almost always the property being financed. In other words, if the deal goes south and the borrower is unable to repay the loan, the lender can seize the collateralized property to mitigate their losses. 

Of course, most conventional mortgages work this way. What distinguishes hard money loans is that the collateral is the main lending criterion. The borrower’s income and creditworthiness may still be factors, but they are less important than the value of the asset itself.

Private Money Loans Defined

A private money loan is a loan issued by a private entity instead of a conventional bank. This could be an individual or a company. The key difference is that the lender is not subject to the same regulations as traditional banks. 

As a result, private money loan terms and lending criteria can vary widely. For example, a private money lender could base lending decisions on creditworthiness, asset value, debt-to-income (DTI) ratio, or a combination of factors. 

How Do Hard Money and Private Money Loans Differ?

Ultimately, hard money loans and private money loans are more alike than different—which is why many use the terms interchangeably.  

However, the main difference is that private money loans refer to a broader category of financing under which hard money loans are a subset. Private money loans refer to any loan issued by a non-institutional lender, while hard money loans are private money loans with a specific loan structure, in which the asset value serves as the main lending criterion.

Benefits of Private Money Loans

Now that you know what private money loans are, here are the benefits of choosing them over traditional financing:

Flexible loan terms. Subject to fewer lending regulations, private money lenders offer more flexible loan terms, including asset-based loans. Don’t have a W2 or regular income? No problem. Private money lenders care most about the viability of the underlying deal.

Quick loan approval. Unlike conventional banks that take 30-60 days to close, private money lenders typically close in a week or even a few days since the underwriting process involves less paperwork and red tape. 

Interest-only periods. Many private money lenders offer interest-only periods for short-term bridge loans. This helps minimize payments during the most capital-intensive phase of a remodel or construction project. 

Faster portfolio growth. Private money loans are a great way to leverage property equity to grow your portfolio—especially if you’ve already exhausted other financing options. As long as the numbers work, private money lenders are willing to fund your next project.

Potential Drawbacks of Private Money Loans

That said, here are some potential drawbacks of private money loans:

Higher interest rates. Because they take on more risk, private money loans have higher interest rates than conventional mortgages. However, you can often refinance short-term bridge loans into longer-term mortgages with lower rates without penalty. 

Potential relationship damage. If a private money lender is a friend or family member, you risk damaging the relationship if you’re unable to repay the debt. However, you don’t need to borrow from an individual. Many private money lenders are companies like ABL that thoroughly vet deals to help ensure borrowers succeed.

6 Tips for Securing a Good Private Money Loan

Before you take out a private money loan, here are some tips to follow:

1. Prepare exit strategies. Private money lenders want to see that you have a solid plan to repay the loan—whether that’s by selling, refinancing, or renting out the property. Additional backup plans can further reassure lenders and help you mitigate potential risks.
2. Compare lenders. Look for private money lenders with experience funding your type of project. Then get quotes on interest rates and other loan terms and check online reviews and ratings from past borrowers. 
3. Have skin in the game. Show private money lenders that you are personally invested in the project by putting up collateral and highlighting your reputation as an investor, including how many successful (financing) round trips you’ve made. 
4. Negotiate loan terms. Don’t be afraid to discuss interest rates, fees, and other loan terms. Compared to traditional mortgages, private money loan terms are more negotiable. For example, you can often leverage your experience to sweeten the deal.
5. Consider the full loan cost. Beyond the interest rate, factor in any fees, points, or pre-payment penalties—which could make or break a deal. 
6. Be transparent. A private money lender invests in your success. So be open with them about your project plans and any potential challenges or risks. This builds trust and helps you find solutions together.

The Bottom Line

At the end of the day, hard money loans and private money loans can both be valuable tools in your real estate investor toolkit—especially if you’re serious about scaling your business. Unlike traditional mortgages, private money loans offer flexible loan terms, can close in days (not months), and aren’t as tied to your income or creditworthiness. 

Ready to take your business to the next level? Consider partnering with ABL. We offer the only true zero-point program in the industry, close loans in as few as three days, and work with you from start to finish to ensure your project succeeds. Get pre-approved within the next 24 hours!