Do you understand the difference between hard money bridge loans and peer to peer loans? If you’re thinking about either type of loan, there are some distinctions you really must understand.

First of all, the major difference is that hard money loans are secured by real estate using a low Loan to Value (LTV) ratio and a high interest rate. Credit score really doesn’t matterto hard money investors, because they are after the high rate of return. The safety of their investment comes from the fact that they can foreclose on the collateralized real estate if the borrower can’t continue making payments.

For them, the loan is actually pretty safe, because the LTV is not only low-balled (60 to 70% max LTV, typically), but the value itself is low-balled using a value that is deemed by the investor to be the “quick sale value.” This means the underwriter can usually get his or her capital back in a short amount of time in case of default.

Now, let’s cover the bridge loan aspect of this. A bridge loan is basically a short term loan that is designed to fill the gap between the purchase (or need for capital, as the case may be) and the securing of conventional financing. Most conventional financing sources (underwriters/loan investors) require a seasoning period from the time of purchase before they will allow a property to be refinanced.

As an example, let’s say an real estate investor has the chance to purchase a property at below it’s true market value, but the property needs a lot of fix-it work. will not loan money because of the condition of the property, a hard money loan may be secured which would offer the property buyer the time necessary to make needed repairs. Then the hard money loan would be refinanced conventionally at a lower rate. Frequently, fast hard money loans are available so you don’t have to wait forever to close the deal.

Lastly, peer to peer lending is simply business or real estate loans made from one private party to another, and usually not secured by real property. For instance, a business person gets a big order, but perhaps does not have the money to purchase the raw materials to complete the order. So he goes to a private investor who understands his business and has some capital to lend. He is resorting to peer to peer lending in this case to get the deal done.