The myths about private lending are numerous and varied. The most prevalent is perhaps the misconception that hard money is so named because it is hard to get (in fact, it can be much easier and quicker to qualify for a hard money loan). Below we debunk four other common misunderstandings about private lenders and hard money loans.

Myth No. 1: Hard money loans are the last option of desperate borrowers.

Truth: This misconception most likely stems from the shift in focus of private lenders from the borrower’s finances and history to the equity of the property that will secure the loan. Unlike banks and other institutional lenders, private lenders are willing to overlook other shortcomings in a deal if the equity is sufficient. However, the majority of hard money borrowers are savvy, successful individuals or businesses that happen to have a financial situation or investment opportunity that does not conform to the strict requirements of institutional lenders. There are many reasons for borrowers to opt for hard money loans: they are self-employed and unable to meet banks’ income documentation requirements; their business is young or a start-up without a lengthy, proven track record; they have a less-than-stellar credit history; they need the funds quickly (in weeks rather than months); or they want flexibility or creativity in the structure of the loan.

Myth No. 2: Private lenders are really just loan sharks.

Truth: Private lenders are successful, experienced business people who are willing to invest their own money, or money invested in a larger fund, in loans that they believe will provide the best possible ROI. Because they are in control of their funds, they can make decisions about loans directly, rather than referring applications to a loan committee. As small companies, most private lenders rely heavily on word-of-mouth, referrals, and a good reputation to bring in business rather than a large marketing budget. This means that if you do your homework, it is not difficult to tell the reputable private lenders from the dishonest ones, or from brokers who are masquerading as private lenders.

Myth No. 3: Hard money loans cost too much.

Truth: While hard money loans do have higher costs than traditional financing, these are often canceled out by other factors, such as obtaining funding quickly enough to take advantage of a discounted purchase price or to buy out a partner who is in need of fast cash. It’s important to consider all aspects of the lending scenario to determine whether a hard money loan would benefit your deal.

Myth No. 4: Private lenders approve risky loans.

Truth: Private lenders are actually less likely to approve truly risky loans because they are lending their own money rather than someone else’s (as with employees of institutional lenders). A private lender will typically only approve loans against properties that he or she is able to ascertain the value of with a degree of confidence, no matter how financially solid or experienced the borrower appears or how strong his or her track record is. However, private lenders may be perceived as risky because their knowledge and understanding of the local real estate market will lead them to approve loans that others deem to be too high risk.