Understanding the Interest Rate Challenges in Alternative Lending

Several market factors should be considered when assessing the actual cost of hard money financing, including interest rates.

last updated Sunday, July 13, 2025
#Hard money lenders #Mortgage Interest Rate

---



by John Burson

QUICK LINKS

Today, you can effortlessly search for home mortgage interest rates online and run a comparison among different nontraditional lenders. However, running similar comparisons with private money loans is harder. Both borrowers and brokers want information on interest rates among hard money lenders. The lack of knowledge is due to several factors, such as federal fund rates, that drive hard money loans.

Other factors influencing interest rates in alternative investing and financing include:

Speed and Supply

Supply and demand influence interest rates; for example, the increase in hard money loans in California has driven down the interest rates. Non-conventional loans rely on the asset's value instead of the borrower's financial credibility. Between hard money and private money loans, the former depends on a more formal structure with some regulation. In contrast, the latter offers more flexible financial terms for individuals, friends, and family.

Nontraditional loans also process faster, with deals closing in one to three weeks, unlike traditional lending, where borrowers have to wait up to three months to access the loan. Borrowers in a crunch to close a deal or pay off a debt can access financing faster. The closing speed affects the interest rates: for example, a loan that must close in two days will have a higher interest rate than a loan that can wait a month.

Location and Value

Another major factor influencing interest rates in alternative lending is the loan-to-value (LTV) ratio. The reliance on collateral instead of the borrower's creditworthiness means that the LTV controls the interest rate. In these types of loans, an individual's creditworthiness takes a backseat. Regarding the LTV, a lower LTV translates to a lower interest rate and vice versa.

The location of the collateral also plays a role in determining interest rates. Hard money loans rely on assets, and lenders must consider the time it will take to close the deal, as well as the state's foreclosure costs. States with a more prolonged and costly foreclosure process tend to attract higher interest rates.

More factors beyond those stated here influence interest rates in hard money lending. Alternative loans rely on different characteristics than traditional ones, making it harder to predict interest rates. Therefore, lenders and borrowers must assess each deal independently, without relying on the given interest rate as a guarantee. Every lender should weigh the factors influencing the loan, such as LVT, supply, location, and speed, before quoting the interest rate, as well as other external and internal factors specific to the deal.

 
 
 

Free Consultation