Private Money Lending: What Is It and How Does It Work?
Written by
Douglas Ehrman
Edited by
Melanie Grafil
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If your credit score is less than perfect, getting a traditional loan from a financial institution may prove to be problematic. However, the wide availability of payment platforms has made private money lenders and peer-to-peer lending increasingly common.
The credit criteria for these types of loans tend to be more relaxed, but the result is that the interest rates are often higher. Understanding this alternative to a bank loan gives you a new credit option to consider. Keep reading to learn more.
What Is Private Money Lending?
Private money lending involves getting financing from a nontraditional source of funding. It may appeal to borrowers with weak credit or real estate investors who are looking for other financing options beyond banks. A private personal loan can be issued by a private party rather than a bank, credit union or other formal financial institution.
You can use these loans for various expenses. Some borrowers use private money lending as personal loans, while others use the money to acquire businesses and buy real estate. Private money lenders typically have easier requirements, faster funding, and more flexible terms than traditional lenders.
How Do Private Money Loans Work?
Private money loans are similar to traditional loans. You are given a lump sum, and you have to make regular payments based on the terms. Each private money loan also has an APR, plus any fees, depending on the lender. While these loans are easier to obtain, they are typically more expensive than traditional loans.
Private lenders get their funds from various sources. A pool of investors often provides the capital, whether it’s a group of individuals or organizations.
Private Money Lending vs. Traditional Bank Loans
| Feature | Private Money Loans | Traditional Bank Loans |
|---|---|---|
| Approval process | Faster, with flexible requirements | Longer process, requires extensive documentation |
| Credit requirements | May accept lower credit scores | Typically requires good to excellent credit |
| Loan terms | Short-term, higher interest rates | Long-term, lower interest rates |
| Collateral | Often required — real estate, assets | Usually required for secured loans |
| Regulation | Less regulated, varies by lender | Highly regulated with standard policies |
| Best for | Borrowers needing quick access to funds | Borrowers seeking lower interest and stability |
Pros and Cons of Private Money Loans
Pros
- Lending standards tend to be lower because it’s not a traditional lender or a banking institution.
- Private lenders are most interested in your ability to prove that you have a recurring source of income and that you will repay the loan.Â
- You can establish your income by simply providing bank statements or recent pay stubs.
- There is a short application process, and you often know if you are approved or denied on the same day.Â
- Because your credit plays a smaller role in the process, there is less for the lender to verify.
- If you need short-term money quickly, a private personal loan can be a good source of funds rather than traditional financing.
Cons
- Private personal loan rates are usually higher because the loan is approved based only on income and not credit history. This puts these types of loans at a higher risk of nonpayment. To offset this risk, the lender sets a higher interest rate.Â
- If a private lender makes enough high-interest-rate loans, even with a higher number of defaults, it should still be able to make money.Â
- The high cost of the loans that get paid back will cover those that do not. As the borrower, this added cost should be taken into account when deciding if this type of loan is right for you.
Who Should Consider Private Money Lending?
Private money lending is a good option for people who can’t qualify for traditional financing. However, it’s also a valuable resource for real estate investors who need quick access to extra cash. Some private money lenders approve applications within 24 hours, and that’s an unrealistic timeline for banks and credit unions.
Small business owners may also want to consider private money loans. This alternative funding source can help business owners who report low taxable income due to tax write-offs. While a low taxable income can hurt their chances at a traditional bank, these business owners may get financing from a private money lender.
How To Find a Reliable Private Lender
The fastest way to find a private personal loan is to search for private lenders online. It is important to do some research before sharing your personal information with a party you find online to ensure its credibility. Here are some key takeaways:
- Once you have selected a few options, you should carefully read the terms and conditions.Â
- Often, private lenders will come through referrals within your real estate investments or network.Â
- Try to build your contact list from people such as friends, family and colleagues.
- Make sure that you have the information and documents needed to complete the application.Â
- Above all, since it is easy to rapidly click through some of these sites, make sure you are cautious and thorough.
How To Apply to a Private Money Lender
Once you have selected the lender that fits your needs, the process should be very straightforward:
- Follow the prompts to complete the online forms.
- Gather the required documentation. You might be required to provide your recent pay stubs or bank statements. This information can usually be submitted online.
- Once your information has been provided to the lender, you can expect a relatively quick decision. If you receive a positive response, you may be able to get your loan funded the same day.
Good To Know
Ultimately, there are advantages and drawbacks to taking out a private personal loan to meet your cash needs. Compared to a personal loan from a bank, the private lending process tends to be streamlined and very simple. However, the interest rate you will pay for this type of loan will be significantly higher.
Credit-challenged borrowers are usually drawn to this type of loan because it is easier to secure. When deciding to take this type of loan, you should weigh the cost of capital against your needs.
Final TakeÂ
Many people use personal loans to meet their cash needs. You might wish to consolidate your credit balances. You need money for a large purchase such as an investment property or you’d like to take on a new project. Not everyone meets the requirements for a personal loan, though.
If either you or a family member struggles with credit and can’t get a conventional mortgage, you may want to consider alternatives, such as private money lending for real estate from investors or nontraditional lenders.
Private Money Lending FAQ
Here are the answers to some of the most frequently asked questions about private money lenders.- Can I borrow money from a private lender?
- Yes, you can borrow money from a private lender. Be aware, though, that they're not affiliated with a bank or credit union. These private lenders can range from individuals to organizations.
- What is a bridge loan?
- Similar to a private personal loan, a bridge loan is a short-term loan used to bridge the gap between buying a home and selling your previous one. If you are a real estate investor or want to buy before you sell, you won't have the profit from the sale to apply to your new home's down payment and may need this form of loan.
- What is meant by private money lenders?
- Private money lenders are simply lenders who aren't associated with a traditional financial institution such as a bank or credit union.
- Who is the largest private lender?
- One of the largest private lenders is Quicken Loans. They are a large online mortgage lender that is not part of a larger bank or other financial services corporation.
Marc Guberti and Caitlyn Moorhead contributed to the reporting for this article.
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- FortuneBuilders. "Private Lenders: How To Find Them Fast."
