"We’re living in an exciting time where the hard money industry is finally earning the respect it has long-deserved. It’s found its place in the mainstream and will only continue to grow and maintain its newfound positive reputation." This is a statement from an article at Direct Lending Partners titled THE EVOLUTION OF HARD MONEY.
MoneyThumb has many hard money lenders who use our proprietary software, PDF Insights, to make quicker and more informed lending decisions. So the information contained in this post will be of particular interest to those customers who read The Rules of Thumb blog and for anyone considering becoming a hard money lender.
The article from DLP is particularly interesting because it delves into the fascinating history of hard money and offers predictions for its future. As stated in the article, for decades the hard money lending industry was viewed as the black sheep of the lending industry. For anyone who thinks hard money lending is something new, the truth is that the concept of hard money is actually considered to be one of the earliest forms of credit financing, dating back to the 18th century.
Historians believe that Hammurabi, the ruler of Babylon during the 18th century B.C.E., actually invented one of the first lending systems. Throughout time, many other civilizations (Roman Empire, Tang Dynasty, Spanish Empire, etc) have followed suit and developed their own forms of hard money loans.
What Is a Hard Money Loan?
By definition, a hard money loan is a short-term loan from private lenders. Hard money has remained largely unregulated by state and federal law outside of being subject to a few interest rate restrictions. These are often considered loans of “last resort” or short-term bridge loans.
How it works:
- A hard money loan is primarily used for real estate transactions
- Funds for a hard money loan come from an individual or company, not a bank
- Typically taken out for a short period of time, a hard money loan is a great way to raise money quickly, but comes at a higher cost and lower LTV
- The funding time frame is reduced immensely because these loans are not traditionally executed
- Hard money loan terms can generally be negotiated between the lender and the borrower and typically use the property as collateral
The origin of the term “hard money” dates back to the Great Depression in the United States. With the collapse of the banking industry destroying consumer confidence and causing widespread panic, individuals began pulling their money out of bank accounts and keeping it at home, which ultimately led to a mass reduction in the amount of money in circulation.
Hard money loans have unfairly developed an unsavory reputation for being predatory, largely due to being misunderstood and/or misused. However, if used properly, hard money loans serve a useful purpose for investors and borrowers, both in good times and in times of national financial crisis.
The Future of Hard Money Lending
Gone are the days when Wall Street snubbed hard money lenders. Having witnessed the success of many investors, Wall Street has taken notice of what hard money lenders are doing right, and now want their own piece of the action.
The article from DLP forecasts that we will see an increase in diversification among hard money lenders with women and minorities currently being under-represented. With fresh faces and new names abounding, we’re going to see hard money tap into a much larger, previously untapped market.
Following the last great housing crisis, we witnessed the staying power of hard money and its ability to fill a gap that ultimately helped the housing market rebound. With that in mind, we feel confident that the future of hard money lending is bright.