Demystifying Private Money Lenders: A Closer Look at How They Work
Private money lenders generally belong to a lesser-known sector of lending. Traditional banks and lenders are known for providing more common types of residential and commercial loans, whereas private money lenders play a crucial role for borrowers seeking alternate ways to obtain financing. Let’s explore what a private money lender is, how they operate, and why they’re essential in today's diverse financial landscape.
How do private money lenders work?
A private money lender is an individual or a non-institutional (private) person or entity that offers loans to individuals or businesses. This type of lender will typically loan money to borrowers who need cash for their business or buy properties to flip or rent. A private money loan is ideal for borrowers who need reliable access to capital for their next project.
How do private money lenders work? Private money loans tend to be quicker and more flexible than loans offered by institutional lenders, such as banks. Unlike traditional banks or credit unions, private money lenders don’t have to rely on criteria such as an applicant’s credit score or financial history.
Private money lenders also don’t put borrowers through a lengthy approval process. Instead, they base their lending decisions on the material collateral provided by the borrower, along with the potential profitability of the project or investment being financed. The terms of a private loan may differ from one lender to another, and private lenders can use any criteria they want when deciding whether they want to issue a loan.
What are the types of private loans?
Bridge Loans
Private money lenders typically offer bridge loans, which are short-term loans created to leverage two properties on a single loan—typically the asset you currently own and the one you're interested in purchasing. The loan is paid off when you sell the original property.
A bridge loan is beneficial because it allows you to use the equity in both homes. You may not be required to make a down payment in the transaction because you're using the equity from your existing home toward the purchase of the new property.
Hard Money Loans
A hard money loan can be used to refinance a current loan or purchase an investment property. Either way, the loan must be considered a “business purpose loan”
What are the advantages of using a private money lender?
Now that you understand what a private money lender is, let’s take a look at some of the advantages a private money loan offers:
Asset-Based Lending
Private money lenders specialize in asset-based lending. This means that the loan's approval and terms are determined by the total value and quality of the collateral offered by the borrower. Common types of collateral may include residential, commercial, or even industrial real estate.
Flexible Terms and Customization
Because private lenders operate on their own, they can offer more flexible terms, customizing loans that can fit the individual needs of investors.
Shorter Turnaround Times
One major advantage of working with private money lenders is their ability to offer financing solutions quickly. Unlike traditional lenders—whose approval processes can be lengthy and tedious—private money lenders offer rapid approval and funding, often within just a few days. This makes them an ideal option for borrowers who need immediate funding.
Specialized Lending
Private money lenders generally specialize in certain types of loans, such as residential or commercial properties. This focus allows them to understand the unique needs of each investor and customize their loan terms accordingly.
More Options in Real Estate Investing
Private money lenders offer financing for many different types of scenarios. Private, or Hard money loans can be utitlized by house flippers, property developers, investors who seek out distressed or undervalued properties, and many times those that simply need quick cash for their business. Private money lenders offer quick financing options without a lengthy underwriting or due diligence process.
What are the disadvantages of using a private money lender?
Higher Interest Rates
Compared to traditional lenders, private money lenders tend to charge higher interest rates. This is because of their willingness to take on greater risk by lending to borrowers who may not meet the strict standards that traditional banks require. That’s why borrowers should carefully consider whether the benefits of quick access to capital outweigh the higher interest rate.
Higher Closing Costs
Private money loans will have higher closing costs than most institutional lenders, so it’s important to determine if a higher cost loan can be used appropriately when needed.
How can private loans benefit you?
Private money lenders offer funding to borrowers who may not have access to capital through traditional methods. Although the higher interest rates of private loans may turn off some investors, the speed, loan term flexibility, and specialized lending services they provide make them a great option.
At Val-Chris, we proudly help our partners achieve their goals with effective communication and planning. Get the best experience with hard money lending! Work with investors and brokers you can trust. Contact us today to learn more about our private money loan servicing.
