Benefits and Drawbacks of Using a Private Lender
Private lenders are a very important part of the financial system in a society. Many people opt to deal with private lenders because of the ease of doing business with them. However, before you approach a private lender for hard money loans, you should know the pros and cons of this funding source:
Benefits of Using a Private Lender
Borrowing money from a private lender can offer you many benefits that you would not have had access to if you had chosen a traditional financial institution, such as:
- Fast Approvals: You can secure your loans swiftly with a private lender. If you visit a traditional lending institution, you will be required to complete extensive paperwork and meet strict conditions set by the bank in order to get approved. Approval times drag on for weeks, sometimes exceeding a month. However, such difficulties do not arise when dealing with a private lender. You will mostly be meeting the lender directly, who will assess your project and quickly decide whether you are eligible for a hard money loan. Most private lenders approve the loans within a week.
- Customized Lending Terms: With a private lender, you will have more freedom to create a customized repayment plan. With a big financial institution, you won’t have this freedom. Instead, you will have to accept the payment terms set by the bank. However, with a private lender, you can discuss and come to a mutually agreeable repayment plan that you think is suitable for you.
- Simplified Repayment Terms: You will have greater flexibility in structuring your loan repayment with a private money lender than with a financial institution. If you take out a loan with a bank, the repayment terms are typically set as per their defined policies. Though some adjustments may be made, most of the time you will have to accept the repayment structure set by the bank. On the other hand, you are likely able to work out a mutually agreeable repayment term with a private lender.
Drawbacks of Using a Private Lender
Just as there are benefits to using private lenders, there are also a few conditions you need to consider:
Higher Interest Rates: You will have to pay a higher interest rate if you take a loan through a private lender. Private lenders usually lend money to individuals who may face difficulty in getting a loan from a big bank, due to bad credit or lack of a financial track record. Because of the risk attached with lending money to such individuals, private lenders offset those risks by charging higher rates of interest.
Short Term Funds: A private lender is only a suitable choice if you are seeking funds for the short term. If you are planning to take a loan that extends to multiple years, then a private lender is not a suitable choice. This is because of the higher interest rate, which over the long period of time will eat away at your overall profit. Most lenders you will come across will only be interested in lending money for the short term — anywhere from 6–18 months.
If you are a borrower with good credit and stable financial history and need a long-term loan, then a conventional bank may be the option you want to consider. However, if you are looking for a short term loan which is funded fast and gets you in and out of your fix and flip property, a private lender might be just the right fit.