Scotsman Guide, one of the biggest names in mortgage lending news, recently announced they would no longer be referring to hard money by that name. The change was affected immediately. Moving forward, they will refer to hard money as ‘private lending’. Scotsman Guide is certainly free to do as they please, but hard money is still hard money.
In a press release announcing the decision, Scotsman Guide explained their belief that the old term has taken on negative connotations over the years. They claimed that hard money is now associated with “high interest rates and unfavorable loan conditions”. That may be true, but the same people who criticize hard money now will continue doing so.
From this writer’s perspective, referring to hard money as ‘private lending’ could do more harm than good by introducing unwarranted confusion. Here’s the deal: all hard money lending is private lending, but not all private lending is hard money lending. Combining all private lending under a single moniker would only make it more difficult to distinguish between the many types.
Historically speaking, hard money lending has been understood as a form of private lending based on the value of the borrower’s assets. For example, let us say Salt Lake City’s Actium Partners were asked to fund a commercial real estate transaction through a hard money loan. Actium would expect the borrower to offer collateral. In all likelihood, the piece of property being acquired would be that collateral.
The collateral is the hard asset used to provide security for the deal. Everybody involved knows how it works. Third parties discussing the deal also know how it works. They all understand what hard money is and how collateral plays a role.
Where hard money lending is pretty specific, private lending is more broad. For example, there are private lenders who write residential mortgages. They work with mortgage brokers to work out deals with homebuyers in much the same way banks and credit unions do. Yet these private lenders are not hard money lenders. They are mortgage lenders
Another good example of private lending that doesn’t qualify as hard money is a practice known as peer-to-peer (P2P) lending. Under a P2P scenario, investors connect with borrowers through a technology platform. A single investor may lend to a single borrower or pool their finances with other lenders willing to make larger loans.
While P2P lending does qualify as private lending, it is not the same thing as hard money. The same goes for crowdfunding, social funding, etc. All these other forms of private lending have their unique aspects. They also have unique names that make it easy to designate between them. Excluding hard money and renaming it as private lending does a disservice to lenders and borrowers alike.
What makes the Scotsman Guide decision even more difficult to understand is the fact that the critics will still criticize hard money no matter what it’s called. Fifty years ago, hard money was criticized as being predatory lending. Some critics even tried to link it to organized crime. The industry spent years restoring its reputation by proving such allegations false. And what did the critics do? They found new ways to criticize.
Referring to hard money as private lending will not change anything. Critics are still going to complain about higher interest rates and shorter terms. They will continue to mislead consumers simply because they do not like the hard money concept. What it is called will not make any difference.