Hard Money Loans vs. Soft Money Loans

Money is loaned out to individuals and businesses under certain terms that cover the interest rate, period of loan and service charges, if any. When these are below market rates and at concessional terms, such loans will be designated as soft loans. Traditional loans offered by lending institutions can also be at times classified as soft loans. Hard loans on the other hand, are those offered by private investors and the terms on such loans may quite often be very stringent and interest rates much higher than the market rate.

Soft loans are those offered by institutions and will be normally be at the market rate. Where borrowers have a very high credit rating, they may be able to extract some concession, even on these rates. Soft loan repayment schedules will be reasonable and easy to sustain by the borrower. Loans are always recorded and easy to trace, thus becoming very much a part of any credit history, and repayments on such loans will be diligently tracked by credit companies. This can enable a very good credit score to be built up, by adhering to all the terms of the loan.

People who do not have a credit history or a poor one may still find it possible to get loans from private investors willing to take the risk. Interest rates will be well over that offered by the market, and repayment terms will be very stringent and may leave the borrower far less time to repay the loan. Hard money lenders are those who and are willing to take additional risks, because they see a potential for greater returns. As a result points on origination and higher interest rates are assessed accordingly.

In the case of both hard loans and soft loans, there will be certain eligibility criteria that borrowers will have to meet. Lenders always expect loans to be repaid and will be very particular on being informed about the schedule of repayment. Most of these loans will also be covered by some form of guarantee, which reduces the risk for the lender. Collateral is quite often common to both forms of lending and greatly eases the terms, if the collateral has sufficient value and is properly and legally secured. In most cases property is accepted as collateral, though other personal assets are also sometimes considered sufficient to guarantee the loan.

Most lending institutions that offer soft loans are subjected to government regulations that are quite stringent, and this makes it difficult for people with poor credit to get soft loans, even if they have assets that they are willing to pledge as collateral. Hard money lenders are not part of such scenarios, and will therefore be willing to take the risk, as long as they judge that the borrower has the capacity to repay the loan. They will carry out their own diligence regarding this and insist on proper repayment plans, backed by authenticated figures of future income, which can help to repay the loan.

Hard money loans require lesser formalities and are quicker to get than soft loans, which have to follow the complete procedures as laid down in government regulations.

When needing funding for a real estate project, your choice of loan will depend on your own financial strengths and timeframes involved.

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