For individuals and small businesses who either don't want or can't qualify for a traditional bank loan, private lending is a very attractive alternative, and hard money loans issued by private lenders have several advantages over traditional loans. For one thing, hard money lenders are not regulated by the government like banks are. During a time when fewer people are trusting the government, this creates an atmosphere in which hard money lenders are becoming more popular.
The Rules of Thumb blog from MoneyThumb has many customers who are hard money lenders and take advantage of our PDF financial file converters specifically designed for lenders to help them make more informed and quicker lending decisions. Since we try our best to cater to our customers, this blog post will provide a fascinating history and the evolution of hard money and explain why there continues to be an increase in private loans.
In this article from Direct Lending Partners, the origins of hard money are covered and it truly is an interesting story. For instance, 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.
Where did the term “Hard Money” originate from?
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.
This resulted in people finding they were unable to get access to additional cash when they were in need of it during the Great Depression. Lenders sought out a solution to help resolve this by offering loans that utilized real estate as collateral. Due to the risky nature of this type of loan, higher interest rates were charged, but with no other way to get quick cash, many property owners had no alternatives than to take out hard money loans.
Since that time we’ve seen hard money lending hit some highs and lows over the years in terms of its reputation. In the 1950s, for example, private short-term debt was vital to the world of real estate development. It became somewhat of a “last resort” option for commercial property owners who were looking for capital against the equity of their holdings.
By the 1990s and early 1990s, a major turn in the commercial real estate market resulted in an unprecedented number of banks experiencing considerable failures and massive losses. Due to this, private lenders became a widely popular alternative when it came to real estate financing.
The Rise of Private Lending
According to research by Bank of America, private lending had more than doubled by the 2010s and private debt within the U.S. is in excess of a whopping $700 billion.
So, why did private lending suddenly develop a better reputation in such a short span of time? It was largely due to real estate investors becoming increasingly frustrated with the Dodd-Frank Act and the hoops they had to jump through. Investors began looking for alternative lending solutions and quickly realized that the oft-referred-to “back alley operators” known as private lenders were now a viable, respectable alternative. Private lenders developed a new reputation of being established, above-board providers of smart lending solutions with billions in AUM.
Investors have discovered that private lending offers a variety of perks that traditional banks cannot provide, such as better speed and execution of loans, unique loan terms that include rehab costs, and the ability to provide more leverage.
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.