How Private Money Lending Differs from Hard Money & Conventional Loans
Private money lending differs from hard money and conventional loans by offering faster closings, flexible approval, and property-driven terms, while conventional loans depend on borrower credit history and hard money loans rely almost entirely on asset value.
This distinction matters for real estate investors in Chicago who need to match the right financing tool to their strategy.
Why the Loan Type Matters in Real Estate
The financing method you choose can decide whether your deal succeeds or falls through. Conventional mortgages often move too slowly for urgent opportunities, while hard money may be too costly. Private money bridges the gap, giving investors both speed and flexibility.
What Is a Private Money Loan?
Private money loans come from individuals or small groups instead of banks. These loans are often used for:
- Fix-and-flip projects
- Acquiring distressed or probate properties
- Competitive markets where fast closing is essential
Because approval is based more on the property’s potential than strict borrower history, private loans are popular among Chicago investors who need to close within 7–14 days.
What Is a Hard Money Loan?
Hard money loans are similar but are usually provided by licensed lending companies that specialize in short-term real estate financing. According to Investopedia, hard money loans rely almost entirely on collateral, often with higher interest rates and shorter terms than private loans.
Defining features of hard money loans:
- Higher interest rates
- Loan terms typically 6–18 months
- Approval based on property collateral (purchase price or ARV)
- Best for quick flips or bridge financing
What Is a Conventional Loan?
Conventional loans are traditional mortgages issued by banks or credit unions. They work well for long-term real estate investors but are difficult to secure quickly.
Typical characteristics:
- Lowest interest rates of the three loan types
- Longer approval times (30–60+ days)
- Heavy focus on borrower credit, income, and tax documentation
- Loan terms from 15 to 30 years
Conventional mortgages are regulated by the Federal Housing Finance Agency and supported through programs overseen by HUD.
Side-by-Side Comparison
| Feature | Private Money Loan | Hard Money Loan | Conventional Loan |
|---|---|---|---|
| Source of Funds | Individuals/Small groups | Lending companies | Banks/Credit unions |
| Approval Based On | Property + Borrower flexibility | Primarily property value | Borrower credit & income |
| Closing Speed | 7–14 days | 10–21 days | 30–60+ days |
| Loan Term | 6–24 months | 6–18 months | 15–30 years |
| Interest Rates | Negotiable, moderate | Higher | Lowest |
| Best Use Case | Fix-and-flip, fast deals | Bridge financing, distressed assets | Long-term buy & hold |
FAQs About Loan Types
Is private money safer than hard money?
Private money can be more flexible and relationship-driven, while hard money loans are often costlier and less negotiable.
Can I use private money for rental properties?
Yes. Many investors combine private money for purchase and rehab with a refinance into a conventional mortgage—a strategy known as BRRRR.
Which option is best for first-time investors in Chicago?
Private money is often the best starting point. It allows faster closings than conventional loans and more flexible approval than hard money.
Why Motivated Sellers Should Care
Understanding loan types matters for sellers too. Buyers backed by private or hard money lenders can close far faster than those relying on bank mortgages. For Chicago homeowners who need to sell quickly due to foreclosure, relocation, or financial strain, these buyers may represent the best option.