Why Comparing Hard Money to Payday Lending Is Misleading

I was recently reading an article discussing the finer details of hard money lending. Like so many others in this particular genre, the author didn’t have many good things to say about hard money. One particular statement was especially troubling. The author wrote that hard money lenders are “similar to payday lenders.”

I understand the author’s intent. Nonetheless, the statement is highly misleading. Hard money and payday lenders are similar only to the extent that they are both private lenders that are not regulated the same way as banks. But beyond that, the similarities are few and far between. Hard money and payday lenders are not even in the same league.

Their Customers Are Different

For starters, the customers that fuel both types of lending are completely different. Hard money lenders almost never – if at all – lend to individuals looking for money to cover personal expenses. According to Actium Partners out of Salt Lake City, UT, nearly all hard money loans go to either real estate investors or established businesses.

On the other hand, payday loans are aimed at individuals who need money to tide them over until the next paycheck. These are generally people who have an emergency expense or a bill that has come due but don’t have money in the bank to pay. They rely on payday loans to make up the shortfall.

Loan Purposes Are Vastly Different

Next up, the purposes for both types of loans are drastically different. Let us start with payday loans. They are pretty straightforward on this point.

As previously stated, people obtain payday loans to make up for cash shortfalls between paychecks. Money might be used to buy groceries, make the car payment, pay the rent, and so forth. Payday loans typically are not used to purchase big ticket items. Such purchases often cost too much to be covered by the borrower’s next paycheck.

As for hard money loans, the two most common purposes are property acquisition and business expansion. A property investor turns to hard money to obtain a new property for his portfolio. Meanwhile, a business owner relies on hard money to help her open a second location across town.

As a side note, the values of both types of loans are drastically different as well. Payday loans can range from a couple of hundred dollars to a few thousand. Hard money loans tend to start in the hundreds of thousands of dollars. They can go into the millions.

How Lenders Respond to Default Differs

Even the way lenders respond to default differs among the tune loan types. In a hard money scenario, approval decisions are based on assets borrowers offer as collateral. In the event of default, a borrower simply forfeits said assets and that is it. The assets become the property of the lender.

The important thing to remember here is that taking assets is a measure of last resort. Lenders do not actually want to own borrower assets. That’s why they are very careful with loan approvals. They also don’t want to string loans out indefinitely. Hard money loans typically have terms ranging from 6 to 24 months. Lenders expect loans to be satisfied on time.

When it comes to payday loans, most lenders have no trouble rolling one loan into another. If a borrower cannot pay this week, no worries. He gets a new loan and pays it in two weeks. Rolling one loan into another allows a lender to collect more and more interest.

Hard money and payday lenders are barely similar at all. To claim otherwise is misleading, at best.