Private money lending involves individuals offering cash to investors during a cash crisis while securing the loan with a tangible asset or property. This article centers on private lender interest rates.
Private money lending acts as a substitute for traditional money lending institutions like banks and other financial institutions. Private lending may come in whereby a Real estate investor has an urgent and expiring deal at hand or whereby one can’t qualify for the bank’s traditional loan.
In this piece of text, we are going to have a deeper view of private money lending and private lender interest rates as well. Private lenders charge an interest rate of 15% to around 20%. A relatively higher interest rate might be due to a poor credit score or if purchasing the subject’s property is somehow risky.
Difference Between Private Money Lending and Hard Money Lending
Private money lending is when an investor borrows cash from someone with the ability to bring in effective capital into one’s investment or deal. A friend, colleague, family member of an investor might be interested in your deal or investments thus decide to give you a hand (as in loan) or be part of your venture.
Hard money lending is a semi-institutional money lending process whereby an investor borrows money from an individual or private company using an asset as collateral for the loan.
Hard money lenders have their set criteria and procedures to be followed during the loan application, loan repayment, and refinancing processes. This form of money lending lies between conventional financing and private money lending.
How Can One Find Private Lenders?
This is one big puzzle a vast proportion of investors has not been able to solve for quite some time now. Every investor, especially beginners, is always in search of a private lender who can help finance their upcoming project at favorable interest rates and terms as well.
Many lenders have specialized in offering hard loans to real estate investors and homeowners. Here are a few ways to find a private investor through various platforms and approaches.
- Search the keyword ‘Private money lenders’ on Google
- Tap your local real estate market network
- Search for lenders on social media especially on LinkedIn
- Your colleagues, family, and friends
- Attend live events that might seemingly attract big investors.
Remember that private money lenders don’t have to be pros in the financial field. All you simply need is to find an individual with cash in hand to lend you the money you need for your next investment. Depending on the type of lender you’ve gone for, you might face interest charges or not. One can even decide to work with more than one lender to obtain the amount of cash needed provided that you agree with the terms and conditions set by the lender.
Advantages and Disadvantages of Private Money Lending
Advantages
Private loan lenders give investors the opportunity to access mortgage loans for purchasing damaged property, renovating it at a relatively cheaper price then reselling it at a bounteous profit to earn revenue.
Private lenders don’t need many requirements during loan application. Unlike other lenders, private lenders focus on the profitability potential of the property rather than having to follow up on the borrower’s financial status and credit score as well.
Private loans are approved and granted to the borrower within a very short span of time i.e. 1-2 weeks whereas a traditional bank loan takes up to 9 weeks to be approved.
Disadvantages
Private lenders are known for their abnormal interest rates due to a borrower’s poor credit or during a risky purchase. Private lender interest rates range from 14-20%. Lenders can even add ‘points’ to the loan as an expense towards default borrowers.
Raising money from private loans is a short-term course since you will have to pay it back within the next 6-12 months, unlike traditional loans which give one ample time to pay long-term loans e.g. a 20-year period loan.
Private lenders require tangible assets or property to hold as security for the cash offered. Failure to pay the loan in time will make the private lender sell the collateral property to repay your outstanding loan.
However, note that the disadvantages stated above cannot hinder your investment plans as long as you keenly do your research before striking a deal with any private lender.
Risks With Private Money Lenders
There are a few risks faced during private money lending both from the lender’s and borrower’s sides. Sometimes a borrower may fail to do their research about the private lender. This canto loan sharking cases whereby the private lender may get the borrower in trouble if they fail to explain the authenticity of the granted cash.
On the lender’s side, they should be careful to make sure that the borrower is not going to use the cash to perform a dangerous investment. This might even put the lender in trouble if follow up is done and the source of income tracked back to them.
Furthermore, lenders are at risk of default loans since some borrowers may fail to repay the loan due to their own known reasons. In such cases, the private lender should take the appropriate legal action against the borrower.
You could also read about private lender vs hard money.
Private Lender Interest Rates – Conclusion
An investor should work towards paying the granted loan as agreed. The full payment includes the interests and any other additional fees included in the loan agreement or as per the provided private lender interest rates.
Failure to repay a private loan can lead to the lender filing charges against you since they have the right to do so as long as your agreement is documented.
Note that private lender interest rates are slightly higher and since every lender has its own criteria when it comes to lending money to investors. Remember, all private money lenders have to follow banking laws and regulations.