A private money loan is a loan that is given to an individual or company by a private organization or even a wealthy individual. However, private money loans can be riskier than traditional bank loans for both the borrower and the lender. There is less regulation so the borrower has freedom of how the loan is used but these loans also come with higher interest rates. There are only certain circumstances, like real estate purchases, where you should use private lending loans because of the risk that comes with them.
When should I use a private money loan?
Private money loans are good for investors in need of quick financing to compete with all-cash buyers. You can use this loan to purchase property before refinancing to a long-term conventional mortgage. You might reach out to get a private money loan if you do not qualify for a conventional mortgage because you have a real estate portfolio with over our existing properties. If you found a good deal on a property but you do not have the cash to pay for it then a private money loan might be your best option. Private money lenders for real estate might ask for more interest than conventional banks and lending institutions.
Another time you should use private money lending is if you need cash. These loans give you the chance to make purchases using all cash which can give you the upper hand in property sales. For people or real estate investors that are looking to get bargain deals on properties, this could be the best way to purchase. Sellers prefer cash sales because of the uncertainty of conventional mortgages and the ease of sale which gives you an advantage if you have cash from the private money loan.
If you have bad credit, private money loans could be your best option. With private money lenders, you can get a loan without having to do the usual credit pulls and checks. Banks usually avoid giving out loans to borrowers with lower credit but private lenders won’t. You can most likely get a loan much easier this way than the traditional way but it does come with a cost. The interest rates might be significantly higher because they can set their own terms. Also, the collateral and costs of the loan might be greater so it is important to do your research before picking a private lending institution.
Risks with Private Money Loans
It is important to check the source of the money so that the loan won’t fall apart. If the money is not secure from the lender’s side the loan could fall apart and make the purchasing process much more difficult. Borrowers who do not fully read and understand the loan agreement may find themselves with a loan they can not payback. You must do proper research on where the loan is coming from and the terms of the loan so you do not get stuck with a loan with a bad rate or that is impossible to pay off. This can make the property buying process almost impossible.
A private money loan is best used for when you need immediate liquidity to compete with all-cash buyers. These can be helpful but usually come at a greater interest rate and with riskier conditions so make sure you do your research before getting one. They can be helpful but unless you really need to we do not recommend taking out too many private money loans. If you fall into any of the categories described then it may be a good idea to get a private money loan.