It is not unusual for financial commentators and media outlets to equate hard money lending with predatory lending. In fact, such references are common enough that a lot of people mistakenly believe hard money lenders are financial predators. Not only are they not, but predatory lending does not even make sense for hard money.

Predatory lending is lending that seeks to take advantage of a borrower’s weaknesses in order to gain a significant financial advantage. Predatory lending is characterized by excessively high interest rates, unusually harsh terms, and very few options when borrowers get into trouble.

Hard Money Is Already Risky

There are exceptions to every rule, but the vast majority of hard money lenders operate as legitimate and viable businesses licensed by their respective states. Therein lies the first reason predatory lending doesn’t make sense for hard money. States would go after the licenses of any lenders deemed to be predatory.

Above and beyond that, hard money is already risky enough. To be a predatory lender, you need to be willing to take on even more risk by engaging in practices that only increase the consumer’s debt. Increased debt translates into increased risk.

Hard Money Is Asset-Based

A key characteristic of hard money lending is its nature as an asset-based transaction. Take Actium Partners in Salt Lake City, UT. They specialize in hard money loans for real estate transactions. They approve loans based on a borrower’s assets.

Let us say a real estate investor wants a loan to obtain a new piece of property. Actium approves the borrower’s application based on the value of the property, utilizing it as collateral to back the loan.

Should the borrower default, Actium now has a piece of property it needs to deal with. The firm has no interest in being a landlord. Now it needs to go through the trouble of disposing of the property through sale, auction, or other means.

It doesn’t make sense for hard money lenders to practice predatory strategies because doing so would increase the risk of default. In turn, this would increase the risk of them having to deal with properties they really do not want.

Hard Money Is Already Profitable

The icing on the cake for hard money lenders is that their business models are already profitable. Hard money enjoys a considerable return on investment due to the structure of its business model. Lenders don’t need to be predatory to make their money. There simply is no reason for it.

That being said, hard money lenders do need to mitigate their risks. So their interest rates are higher than the rates on conventional loans. Yet they are not excessively high when compared to the amount of risk lenders take.

Likewise, the terms on hard money loans are quite short. A typical hard money loan as a term of two years. However, terms can be as short as six months or as long as 36 months. That may seem too short, but it’s ideal for meeting the needs of both lenders and borrowers alike.

Hard Money Meets the Need

The bottom line is that hard money meets a very specific need. It is a need that borrowers generally cannot meet by going the conventional route. Because hard money lenders are willing to take more risks, they need to charge higher rates and offer shorter terms. They also need to be less lenient in response to default.

None of this makes hard money lending predatory. In fact, it is anything but. Hard money lending is a legitimate business governed by straightforward rules and policies. It is not a free-for-all.