Private money loans have seen a significant rise in popularity, especially in real estate and small business markets, due to their relatively flexible finance terms and easier accessibility.
Furthermore, over the past five years, private money lending has thrived with an annual increase of 12%, an example of its increasing demand for versatile and fast-paced financing options.
These loans also serve as a savior for those borrowers who struggle with less-than-perfect credit scores or immediate funding requirements. However, while the benefits can be quite attractive, borrowers need to be mindful of the risks involved with such quick funding options.
This blog will give an overview of what to consider and how potential borrowers can navigate the risk of private money lending with associated rewards.
What are Private Money Loans?
Private money loans are offered by private lenders for real estate, often to those borrowers who are unable to qualify for conventional loans. These loans are primarily real estate or asset-based, where the lender negotiates the loan terms solely based on the property’s value rather than the borrower’s credit portfolio.
Private money lending promotes negotiations that are most suitable for the lender as well as the borrower but also attracts higher rate interests and shorter repayment periods, bringing along major risks.
Loans from private money lenders should only be considered by those potential borrowers who seek fast, flexible, short-term, and high-yield funds. Let’s examine this illustration of terms for a private money loan that a borrower can anticipate:
| Loan Feature | Details |
| Loan Amount | $40,000 – $120,000 |
| Interest Rate | 7%-12% |
| Loan term | 6 months to 5 years |
| Approval time | 5 to 15 days |
| Closing Fees | 1%-3% of the loan amount |
Rewards of Private Money Loans
Private money lending provides various benefits, such as access to quick funding, which provides the borrower a competitive edge in the ever-evolving real estate markets, especially for time-sensitive ventures. Let us explore these rewards to understand the private money lending structure effectively:
- Higher Returns to Lenders: Private mortgage lenders offer these funds at interest rates ranging between 8% and 15% with short repayment periods of 6 months to three years. This is because private lenders attract greater risks with these loans due to the borrower’s inability to qualify for the strict prerequisites of traditional financing. The shortened repayment benefits the lenders to reap their returns as quickly as possible.
- Origination Fees: Private money lenders from real estate often impose origination fees as a percentage of the total loan amount sanctioned. This may range between 1% to 5%, contributing to the lender’s overall profit.
Example of Lender Returns
| Loan Amount | Interest Rate | Term | Origination Fee | Total Return |
|---|---|---|---|---|
| $400,000 | 12% | 12 months | 3% | $48,000 (Interest) + $12000 (Fee) = $60,000 |
| $800,000 | 10% | 18 months | 2% | $80,000 (Interest) + $16,000( Fee )= $96,000 |
- Flexible Terms: Private money lending provides the borrowers with the liberty to freely negotiate the terms of their loan, such as rate of interest, collateral percentage, etc., according to what fits best in their long-term financial goals.
- Quick Approval: Since a loan from private money lenders does not demand elaborate documentation or extensive review processes, borrowers prefer private money loans over traditional loans to save their time and have a stronger competitive hold in the real estate market.
- Easily Accessible: Private financing for real estate loans solely focuses on the collateral offered as compared to conventional loans, which heavily rely on the creditworthiness of the borrower, which provides borrowers with a low credit score to qualify for private money loans.
“ Myths and Facts about Private Money Loans”
Risks of Private Money Loans
While private money loans have their lucrative rewards, they also come with their challenges. Let us understand the risks encountered when considering a private money loan:
- Lack of Consumer Protection: The private money lending market is highly unregulated, which may result in the exploitation of the borrowers by following unfair trade practices, charging unreasonable fees, and hostile loan terms.
- Shorter Loan Terms: Private money loans often have a shorter repayment period, which may create unwanted financial strain on the borrower to repay the loan on time if they do not have an appropriate exit plan.
- Chances of Fraud: Private money lending also attracts individuals who may pose as lenders and use unethical means to take advantage of naive or first-time borrowers.
- Collateral Risk: In case the borrower defaults, they may lose out on the property and face a huge risk of collateral loss as these loans are asset-based.
- Limited Legal Recourse: If there is a fallout between the borrower and the private money lender, the resolution process would be difficult and time-consuming since a substantial part of the private money lending market operates in an unregulated environment due to the minimal protections offered to traditional loans.
Conclusion
Private money loans work as a double-edged sword by offering risks and rewards. For borrowers, they deliver the advantages of flexibility, accessibility, and speedier loan approvals, providing them with the ability to grab lucrative opportunities in such a highly competitive real estate market. Also, private money loans are a boon for non-conventional borrowers who simply cannot fulfill the strict requirements of traditional financing.
For lenders, these loans yield higher interest rates paired with shorter repayment periods along with additional fees, which ultimately add up to higher returns. However, both parties must consider all the aspects before entering into a legally binding contract.
Borrowers must double-check the genuineness of the lender as well as any hidden aggressive loan policies, while lenders must ensure that the borrowers can repay the loan and have a proper exit strategy.
A reliable financial partner like Munshi Biz will help both parties confidently navigate the intricacy of private money loan lending. Munshi Biz delivers the exact resources and guidance to understand the risks and rewards associated with private money lending to encourage their clients to make informed decisions.
Read More: Risk and Redemption: What Happens When Hard Money Loans Go Awry?
Frequently asked questions
1. How long does it take for a private money loan to get approved?
Private money loans are approved within a few days or weeks, depending on the various aspects of the deal involved.
2. What types of properties are considered in private money loans?
When applying for these loans, raw land, commercial, residential, and investment properties are all taken into consideration.
3. Can private money loans be used for renovation projects?
Yes, these can be used for renovating real estate properties.
4. Can foreign investors use private money loans?
Yes, foreign investors can take these loans to invest in real estate in the U.S.
