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Money lending or hard money lending operates on an entirely different set of rules than banking or conventional lending. The major difference is that money lenders want to get their money back quickly. The other is that money lenders will often make loans to persons or businesses that banks will not lend to.
A Different Application Process
The difference between money, or hard money lending and banking begins with the application process. Traditional lenders usually rely upon a credit report to determine whether or not to make a loan. They will use a credit score as the means of evaluation risk and will turn down those with low scores.
A hard money lender on the other hand will want to know if you have the money, or the means to pay it back quickly. A lender making a loan to a business will examine its bank statements rather than the credit score. The lender examines the statement to see if the business has the cash flow, or potential cash flow to pay off the loan. A lender loaning to an individual may want to see proof of income in the form of past paychecks. In the case of loans to real estate investors the lender will want to see proof of the value of the property involved.
Online money lenders will often lend money to people who fill out a simple form and can provide proof of income. In some cases they will demand banking information so they can collect the loan payments electronically.
High Interest Rates
These lending institutions are willing to make such loans because they can charge a much higher interest rate. Some of them will charge as much as 18% or more. They will often charge the maximum interest rate allowed under state usury laws. The higher interest rates make up for the higher risks they take by making such risky loans.
Short Terms and Strict
Part of the way money lenders make their money is with short terms. A hard money loan often becomes due within 160 days. A payday loan can be due in as little as a month.
As in most loans the borrower will have to sign a contract but the agreement will have much stricter terms. Many hard-money loan agreements require the borrower to provide banking information and agree to let the lender collect payment electronically from the borrower’s bank account on certain dates. This process is sometimes called cash advanced and it is used to provide businesses with additional funds.
This kind of lending is often condemned as predatory because it charges high interest and targets those incapable of getting regular credit. Most borrowers would be better off using credit cards or other traditional arrangements.
Part of the reason why such loans have grown in popularity is that credit reports are often not required. Persons with low credit scores and individuals afraid of damaging a credit score often take them out. Certain business deals would not be possible without such arrangements.
Regulation of Money Lending
Currently money lending is regulated by the states most state governments try to limit the practice. The federal government has made no move to regulate the industry despite the creation of a new agency called the Consumer Financial Protection Bureau which is supposed to regulate the financial industry. Since this agency is relatively new it is safe to assume that it will regulate money lending at some point in the future.
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