Hard Money, Terminology and Explanations. Part 1.

    This article will discuss the term Hard Money and some characteristics of Hard Money Loans.

Hard Money. This term is misused frequently in posts and blogs on this site and on other social media sites. Many people claim to be seeking it but their posts show that they misunderstand the basic meaning of the term. (Hint: hard money is easier to acquire if you are experienced. Misusing the term shows inexperience.)

     Historically, hard money referred to a currency backed by a tangible asset (a hard asset), usually, gold or silver. US coinage used to be made from silver and gold. When you laid your money down in coinage you were paying with a metal which had recognized value. In the 19th century and earlier many transactions required hard money for settlement. If you tried to pay for your drink in a saloon with paper currency you might have found yourself in a difficult situation.

    There are other proper uses of the term Hard Money. In a political context it refers to campaign contributions made to a candidate directly. In a financial context it refers to funding that is periodic, repetitive, predictable, i.e. a continuing subsidy.

Soft Money. This would be paper currency. The paper has no value itself but represents or is accepted as representing something of value. At one time US currency stated the value of hard assets (silver or gold) that it was backed by and that it could be exchanged for. Now US currency (and all modern money) is fiat money—it is not backed by anything other than the promise of the government that issued it.

     There are other proper uses of the term Soft Money. In a political context it refers to campaign contributions made to a candidate indirectly, through a political party or a PAC. In a financial context it refers to funding that is a one-time event that cannot be counted on to recur, i.e. a specific grant.

Hard Money Loan. This is a loan that is based more on the underlying asset, the collateral, than on the borrower’s financial history. The borrower’s credit and experience is still important in qualifying for the loan and determining the rate and terms of the loan but a borrower with poor credit may still be able to obtain a hard money loan if the pledged asset has sufficient value and they find the right lender. The information needed to qualify for a hard money loan and the types of loans offered will vary greatly between different hard money lenders. The intended purpose of the loan will often affect the criteria used to qualify the borrower and the terms of any resulting loan.

    The term hard money loan does not refer to a loan that has a high interest rate or high origination charges. These can be features of hard money loans but if you misuse the term this way you will demonstrate inexperience and may lower your chances of finding a lender who will work with you or you may adversely affect the terms that you are offered.

    Does it make any difference when one is seeking a loan whether you receive hard money or soft money? No. In fact, you will receive soft money—a check, a wire, or a credit if you are approved for a hard money loan.

    Part 2 of this article will discuss the terms Hard Money Lenders and Private Money Lenders.

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