Spend a few minutes online and you can easily figure out the prevailing interest rates on all sorts of loans. From mortgages to car loans and personal loans, banks are not shy about disclosing their rates. The same is not true for hard money and bridge loans. You won’t find any information about their interest rates online.
Why is that? Because private lenders do not base interest rates on the same factors that banks utilize. They don’t care about the federal funds rate or the yield on 10-year T-bills. Hard money lenders base their interest rate decisions on a number of unconventional factors.
Below are five things to know about interest rates on hard money and bridge loans. They should make clear why hard money lenders do not advertise interest rates.
1. The Supply and Demand Influence
Hard money lenders operate businesses subject to supply and demand influences. When demand is high and supply is low, prices go up. The opposite is also true. So when there is a large concentration of hard money lenders making deals in a limited geographic area, interest rates tend to be lower.
Salt Lake City’s Actium Partners says that hard money lenders tend to concentrate their efforts locally. This explains why supply and demand influences private lending to different degrees in different geographic locations.
2. Collateral and LTV Ratio
Hard money and bridge loans are secured by collateral. In most cases, that collateral is real property. Thus, lenders pay close attention to the loan-to-value (LTV) ratio of a given loan proposal. That ratio partially determines the interest rate. A general rule says that LTV and interest rates are proportional. A lower LTV suggests a lower interest rate.
3. Collateral Resale Potential
Lenders always have to consider the implications of loan default. In terms of collateral this means taking possession and then disposing of the asset through sale. Repossessing and selling collateral property adds to the risk and potential expense of a hard money loan. It makes sense that higher risk properties would lead to higher interest rates.
Collateral resale potential is a bigger influence in areas with risky real estate markets. If you are talking a booming urban area like Salt Lake City, resale potential is less of a concern. But a city where people are moving out faster than they are moving in presents a higher risk for resale potential.
4. The Borrower’s Timeline
Speed is a definite advantage of hard money lending. Hard money loans can typically be funded much more quickly than bank loans. However, it should be noted that the borrower’s timeline can affect interest rates. The faster the borrower needs the money, the higher the interest rate is likely to be.
5. The Borrower’s Credit History
Finally, hard money lenders generally do not look at a borrower’s credit history when deciding whether or not to approve a loan. Approval is based almost entirely on the strength of the offered collateral. However, that does not mean credit history isn’t in play. It is.
A borrower’s credit history can be a factor when it comes to interest rates. Lenders are smart enough to know that credit history and rating paints a picture of a borrower’s reliability. A good credit history and rating suggests a relatively low risk. Poor credit history suggests greater risk. Lenders will charge higher rates when they believe their risk is higher as well.
And now you know why hard money lenders do not post interest rates online. Determining interest is a case-by-case proposition rather than one relying on static numbers posted daily by the Fed.